The Chinese Automotive Industry TFG 1.0

The Chinese Automotive Industry in 2016 Pg

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Summary The goal of this thesis is to help the reader understand where the Chinese Automotive Industry stands today. To do so I carried out a macroanalysis and microanalysis of the Chinese industry as well as a deep analysis of the Chinese brands, the development of the electric vehicle in China and the current shift towards E-mobility. The main objective of this report was to gather information on the vehicle market and analyze the situation. The first phase consisted of gathering information from secondary research. The main sources of secondary research were: CEDARS database, China Association of Automobile Manufacturers (CAAM), China Commerce Yearbooks, China Main Customs Administration, Chinese Ministry of Public Security, InterChina Analysis and Roland Berger. In China, data may vary significantly depending on the source, and extensive analysis is therefore required to determine which source is more reliable. In this report, I have used data provided by the CAAM and other official sources. Authors calculated the most elaborate data. During the second phase, several car manufacturers and industry specialists were interviewed. Through the interviews, the information from our secondary research was validated and we acquired great insight from different players in the industry about the current situation and prospects for the future. China’s auto market has grown exponentially in the last decade, particularly since China’s accession to the WTO (World Trade Organization) in 2001. China was ranked first in automobile sales and production in 2015 for the seventh consecutive year, with about the same amount of sales and production. There are around 70 carmakers in China. Unlike countries with the largest production, such as the United States and Germany, Chinese brands only accounted for 50% (42% for passenger cars) of local production in 2015. The Chinese government is investing a lot of money to develop the NEV (New Electric Vehicle) industry in China so that Chinese brands can lead the NEV market. According to the Developing Plan for Energy Saving and the New Energy Vehicle Industry (2012-2020), new energy vehicles, including PHEVs (Plug-in Hybrid Electric Vehicle) and BEVs (Battery Electric Vehicles), would reach cumulative production and sales of 500,000 units by 2015, and 5 million units by 2020. Between 2009 and 2015, China produced a total of 497,000 NEVs and almost completed the 500,000-unit goal set by the central government (cumulative NEV sales came a bit lower at around 450,000 units). So this should be considered a success. From the global perspective, China accounted for 17% of the world’s passenger NEV sales in 2014, which rose to 32% in 2015 and further to 39% in H1 2016. China took five berths on the global top 20 passenger NEV makers list in 2014, which rose to seven in 2015 and further to nine in H1 2016. I strongly believe that the subjects like Statistics I, II and III as well as Machine Theory that I took during my degree have helped me to work with the data. These subjects have given me the chance to be critic and analytic.


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Table of Contents Summary ..................................................................................................................... 1 Table of Contents ....................................................................................................... 2 1. Introduction ............................................................................................................ 5

1.1 Goals of the project ...................................................................................................... 5 1.2 Scope of the Project ..................................................................................................... 5

I. MACRO ANALYSIS OF THE FINISHED VEHICLE INDUSTRY…………………….9 1. History of the Automotive Industry in China ....................................................... 9 2. Current Market Situation ..................................................................................... 12

2.1 Capacity ....................................................................................................................... 14 2.2 Production and Sales ................................................................................................. 14 2.3 Exports ........................................................................................................................ 16 2.4 Imports ......................................................................................................................... 22

II. MICRO ANALYSIS OF THE FINISHED VEHICLE INDUSTRY …………………24 1. The Main Players on the Chinese Market ........................................................ 25 2. Chinese Companies ............................................................................................. 27

2.1 The 15 Main Chinese Players .................................................................................... 31 2.2 SWOT Analysis of the 15 Main Chinese Players ..................................................... 34 2.3 2020 Plans and Strategies of the 15 Main Chinese Players ................................... 38 2.4 History of the Main Chinese Players ......................................................................... 42 2.5 Location of the 15 Main Players ................................................................................ 46 2.6 The 15 Main Players: Ownership ............................................................................... 48

2.6.1 State-Owned Companies ....................................................................................... 48 2.6.2 Private Companies ................................................................................................. 49

3. Current Market Situation ..................................................................................... 51 3.1 Domestic Sales ........................................................................................................... 51 3.2 Exports ........................................................................................................................ 53 3.3 Passenger Vehicle Imports ........................................................................................ 55 3.4 Listed Companies (Sales and Profits) ...................................................................... 57

4. Main Professional Predictions for Chinese Companies .................................. 59 III. ANALYSIS OF CHINESE BRANDS…………………………………………......61 1. Top Ten Chinese Brands .................................................................................. 62 2. Chinese Brands vs. Global Brands .................................................................... 65

2.1 Total Market Share ...................................................................................................... 65 2.2 The Passenger Vehicle Market .................................................................................. 66 2.3 The Commercial Vehicle Market ................................................................................ 67

3. Exports .................................................................................................................. 69 3.1 Exports by Type .......................................................................................................... 70 3.2 Top Ten Brands .......................................................................................................... 71 3.3 Top Five Brands by Segment .................................................................................... 71

4. Analysis of Typical Chinese Brands .................................................................. 72 4.1 Geely in the Light Vehicle Market ............................................................................. 72 4.2 Sinotruk in the Truck Market ..................................................................................... 74


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4.3 Yutong in the Bus Market .......................................................................................... 76 IV. ELECTRIC VEHICLES……..………………………………………………………….78

1. Classification of Electric Vehicles ...................................................................... 79 2. The Electric Vehicle in China: Why? .................................................................. 81 3. Development of the Chinese EV Market ............................................................ 86 4. Government Initiatives .............................................. ¡Error! Marcador no definido. 5. Future Perspectives ............................................................................................. 94 V.CONCLUSIONS…………………………………………………………………...…….96 Acknowledgements ................................................................................................. 99 Bibliography ........................................................................................................... 100

Complementary Bibliography ........................................................................................ 100


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Glossary

• BEV. battery electric vehicle. • BRIC. Brazil, Russia, India and China. • CAAM. China Association of Automobile Manufacturers. • CATARC. China Automotive Technology and Research Center. • CBU. completely built unit (manufactured goods for export in completely built form). • CEO. Chief Executive Officer. • CKD. completely knocked down (the parts are typically manufactured in one country

or region, then exported to another country or region for final assembly). • CNG. compressed natural gas. • CPCA. China Passenger Car Association. • CV. commercial vehicle. • EU. European Union. • EV. electric vehicle. • EWVTA. European Whole Vehicle Type Approval. • FMVSS. Federal Motor Vehicle Safety Standards. • HEV. hybrid electric vehicle. • ICE. internal combustion engine. • IT. information technology. • JV. joint venture. • LNG. liquefied natural gas. • LPG. liquefied petroleum gas. • M&A. mergers and acquisitions. • MNC. multinational corporation. • MPV. multipurpose vehicle. • NEV. new energy vehicle. • NHTSA. National Highway Traffic Safety Administration. • OEM. original equipment manufacturer. • PHEV. plug-in electric vehicle. • PV. passenger vehicle. • R&D. research and development. • SEI. strategic and emerging industries. • SOE. state-owned enterprise. • SUV. sport utility vehicle. • SWOT. strengths, weaknesses, opportunities and threats. • USA. United States of America. • WAV. wheelchair accessible vehicles. • WFOE. wholly foreign-owned enterprise. • WTO. World Trade Organization.


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1. Introduction

1.1 Goals of the project The project of writing The Chinese Automotive Industry Yearbook 2016 has lasted for six months. It started in March 2016 and finished in August 2016. The work consisted of writing the third edition of the Chinese Automotive Industry Yearbook. The series began in 2012 and is updated every two years. Jaume Ribera and Cristina Castillo were some of the drivers of this project, the former holds a Ph.D. from UPC and was a teacher when he decided to move to IESE and give lectures as a professor in Operations; the latter is a civil engineer from UPC. In this edition, four different institutions take part: CEIBS, IESE, Roland Berger and CEDARS. Every player plays a different role. CEIBS’ work is to coordinate the four organizations as well as propose and update contents, IESE’s role is to do the proofreading and marketing of the book, Roland Berger’s role is to do some interviews with automotive industrial leaders and CEDARS’ role was to provide updated data. Regarding my share of work in the project, I have been working in Shanghai for six months at CEIBS. Cristina due to personal reasons could not be at work, and she gave me the responsibility of leading the project. My daily work has been to collect data, edit the book and write a new chapter on Shifts Towards E-mobility1. I have enjoyed the work because of the commitment that everybody has shown to the book as well as the demanding conditions that professors set. I wish the reader enjoy the part of the book that I defend as my bachelor’s thesis. My aim is that this thesis becomes a deep but at the same time extensive analysis that will enhance the reader to see the whole picture of China’s automotive industry in 2016.

1.2 Scope of the Project

Macro Analysis of the Finished Vehicle Industry

Industry Development The two main features of the development of the Chinese automotive industry are: • High speed. The industry is very young compared to the industries in the developed

market, as it has only been operating for the last 20 to 30 years. However, it has a high speed of development and is quickly catching up to the auto industries in more developed countries.

• High long-term growth with an uneven short-term sales performance. In 1999, China was

producing fewer than two million vehicles, whereas 16 years later, production reached 26 million units.

The Future of the Industry 1 Included in the Annexes of the thesis.


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China is currently one of the world’s three largest auto producers, along with the United States and Japan. China has not been as affected by the global recession as Western countries. According to the China Association of Automobile Manufacturers (CAAM), sales reached 24 million units in 2015 and more autos were sold in China than in the United States or Japan. China’s domestic sales are expected to be around 28 million units in 2016 and to increase at a rate of about 5% compared to 2015. The auto industry’s potential in China is exceptional due to the growth of GDP per capita as well as a burgeoning middle class. According to the International Monetary Fund (IMF), there were 600 million automobiles in the world in 2005 and there will be 2.95 billion by 2050. The IMF expects there to be more autos in China than in the United States by 2030 and for there to be as many autos in China in 2050 as there are in the entire world today. However, we should keep in mind that the automotive industry in China is not a mature one. The vehicle-to-population ratio (an indicator used to measure industry maturity), is much lower than in the United States, Europe or Japan. Furthermore, after-sales service and other services such as financing, service centers and the used auto market, are still not developed. Exports Chinese vehicles exports have been mired in a downtrend since 2013, because of geopolitical instability in countries such as Iraq and Ukraine, economic hardships caused by weak commodity prices in Chile and Brazil, higher import tariffs, quota and other trade barriers in Algeria and Brazil and worries about Chinese vehicle quality and safety. The ratio of exports to domestic sales is still very low, around 3% in 20152. The main region receiving exports of Chinese autos in 2015 was Asia (excluding Middle East), which accounted for 28% of all exports. South America was the number two importer with a 26% share. In order to be sold in Europe and the United States, autos made in China have to pass the homologation process for those markets. This represents a major difficulty for Chinese companies (their autos do not meet the required safety and quality standards). Besides the mandatory approval of the European Community, autos imported into Europe need a minimum score on the Euro NCAP3. Otherwise, the market will reject them. There are homologation regulations in all countries, but the European Union and the United States are the most restrictive markets.

Micro Analysis of the Finished Vehicle Industry

There are 70 registered automobile manufacturers in China. Chinese provinces have a high level of independence and most of them are the size of many European countries. Almost all of these provinces have seen the creation of at least one automobile manufacturer and the provincial or local government has protected one or several manufacturers.

• Joint ventures (JVs) are among the largest Chinese companies and multinationals (MNCs). MNCs are not allowed to produce autos in China

2 Based on CAAM data. 3 Euro NCAP is an organization that provides an independent assessment of the safety performance of some of the most popular cars sold in Europe.


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unless they form a JV with a Chinese company. The MNC cannot have more than 50% of equity. MNCs can only form JVs with a maximum of two Chinese companies. The biggest ones are GM-SAIC, VW-SAIC and VW-FAW.

• Chinese companies can be state-owned, i.e., supported by the government, such as SAIC, FAW, DFM and BAIC, or can be privately owned, most of which are younger and independent, such as Geely, BYD and Great Wall.

The main objective of automobile manufacturers in China is to gain market share on the domestic market. China is the most attractive market for passenger cars in particular (thanks to growing private ownership). However, some Chinese companies are also making great efforts to export abroad. They are mostly private companies such as Great Wall and Geely. The three largest Chinese group companies, SAIC, FAW and DFM, have a long history on the Chinese market. They consequently have over 50% of the market share in China. All three are supported by the government and are mainly focused on the domestic market, although DFM also exports a significant number, as discussed below. They have a good dealer network and their main objective is to develop high- and medium-end autos for the Chinese market.

Analysis of Chinese Brands While the Chinese automotive market is booming, Chinese local brands are not performing well regarding market share. The total market share for Chinese brands dropped from 60% in 2010 to 48% in 2015. The situation is even worse for the passenger vehicle market, where Chinese brands only accounted for 42% of market share in 2015. The Chinese brands only hold a 25% of market share in the basic car segment. But, they are in a dominant position in the SUV booming market and the MPV segment. The representative Chinese brands in each field are Geely in the passenger vehicle segment, Sinotruk in the truck segment and Yutong in the bus segment.

Analysis of Electric Vehicles Up to 2015 China sold 400,000 cars almost fulfilling its 2012 plan to achieve cumulative production and sales of 500,000 NEVs by 2015. Experts say that the 5 million NEVs cumulative production and sales by 2020 is also achievable. This amazing boom of the electric vehicle industry is due to the government commitment to make the industry grow, up to April 2015 the government had invested 37 Billion in the industry.

Strategic Shifts Towards E-mobility

Today's economies are dramatically changing, triggered by development in emerging markets, the accelerated rise of new technologies, sustainability policies, and changing consumer preferences around ownership. Digitization and new business models have revolutionized other industries, and automotive will be no exception. For the auto sector, these forces are giving rise to four disruptive technology-driven trends: diverse mobility, autonomous driving, electrification, and connectivity.


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Methodology

The main objective of this report was to gather information on the vehicle market and analyze the situation. The first phase consisted of gathering information from secondary research. Our main sources of secondary research were:

• CEDARS database • China Association of Automobile Manufacturers (CAAM) • China Commerce Yearbooks • China Main Customs Administration • Chinese Ministry of Public Security • InterChina Analysis4 • KPMG5 • Roland Berger

In China, data may vary significantly depending on the source and extensive analysis is therefore required to determine which source is more reliable. In this report, we have used data provided by the CAAM and other official sources. Authors calculated the most elaborate data. CAAM references to sales in this report refer to delivery from the manufacturer, not retail sales. During the second phase, several car manufacturers and industry specialists were interviewed. Through the interviews, the information from our secondary research was validated and we acquired great insight from different players in the industry about the current situation and prospects for the future.

Note

The annexes form a very important part of this report. In order to understand this report, it is important to be aware of the complexity of the automotive industry in China. 4 Boutique management consultancy for companies doing business in China. 5 Global network of professional firms providing audit, tax and advisory services.


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I. MACRO ANALYSIS OF THE FINISHED VEHICLE INDUSTRY

1. History of the Automotive Industry in China Three phases can be distinguished in the history of the Chinese automotive industry. The first can be defined as the period in which the industry started, with a major milestone being China’s manufacture of its first car.6

6 To simplify the presentation in the charts and make the charts more concise and visually understandable, we have used brand logos instead of the whole brand name. This is not done to acquire any commercial benefit from the use of the images.

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June 20, 1958 BAIC develops the first “Jinggangshan” Sedan.� August 1958

FAW develops the “Hong,” the first car for

volume production.�

October 1968 Second Automobile Works Co set up.�

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The second phase can be defined as the beginning of the modern industry in China with the establishment of the first automotive joint venture by Beijing Jeep Corp. Ltd in 1984.

January 15, 1984 Beijing Jeep Corp. Ltd.

(run by Beijing Automobile Works and

American Motors Corporation) holds its opening ceremony.

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2000�

1978�

April 11, 1983 First Shanghai Santana assembled successfully at Shanghai Automobile Plant.�

March 21, 1985 Shanghai Volkswagen Automotive Company officially established.�

November 20, 1990 First Automobile Works signs JV project with Volkswagen

for annual production of sedans. March 25, 1997 Sino-American joint venture.

Shanghai General Motors Company Ltd. established.�

July 1, 1998 Guangzhou Honda Motor Corp. Ltd. established.�

January 8, 1997 Chery Automobile Co. Ltd. founded.�

1997 Zhejiang Geely Holding Group enters the market. �

© CEIBS, Shanghai 2016


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However, the industry’s biggest growth has taken place in the last ten years, when the industry has consistently seen double-digit growth.

2000 Annual capacity of automobile production in China exceeds 2 million.�

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2015�

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April 29, 2002 Beijing Hyundai Motor Corp. Ltd established.

September 19, 2002 Dongfeng Motor and Nissan Motor Company sign official

agreement for long-term partnership.

October 25, 2002 Dongfeng Motor Corporation and France PSA

Group sign cooperation agreement.

December 11, 2001 China officially enters the WTO.

May 21, 2004 The Development Policy of the Automobile

Industry is formally implemented.

February 2009 The new Auto Industry Restructuring and Revitalization Plan is

implemented in China.

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August 2010 Ford sells Volvo to Geely.

July 2014 The ‘13th Five year plan of EV development’ and ‘Guidance Opinion

Accelerating Promotion and Application of NEV’ were released



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2. Current Market Situation In the last 16 years, the automotive industry in China has experienced incredible growth that started with China’s entry in the WTO in 2001. The Chinese car industry has become stronger by opening up to foreign markets and this growth has also been driven by a nascent middle class. China’s middle class today is large in absolute terms (157 million people), but is still small as a percentage of the total population (less than 12%). As this middle class grows, sales of cars on the domestic market will increase as more Chinese want to have their own private car. But we must take into account the opposite forces that may arise due to urban policies to reduce the number of private cars. The vast differences between large cities such as Beijing, Shanghai, Guangzhou, (the first-tier Chinese cities with serious traffic problems) and the rest of the country should also be noted. While steps are being taken to reduce the increase in the number of private vehicles in first-tier cities, incentives are often implemented to encourage local people in more rural parts of China to buy their first car. After two years of high-speed growth following China’s entry into the WTO (2001 and 2003), China’s automotive industry moved into a smoother developmental period that lasted until 2009. Chinese auto industry grew at 5%-10% in the past two years and will likely continue this mid-single-digit growth trend, when taking into account such factors as light vehicle sales affected by Chinese macro economy soft landing or “new normal”; car ownership restrictions in big cities; but helped by government incentives (small car purchase tax break; EV subsidy), commercial vehicle demand hit by weak infrastructure investment and lukewarm real estate market. At the time of disruptive technology as Mr. Ma from FAW-VW points out the growth of the entire market is slowing down.

Figure 1. Automobile sales volume in China. Source: Prepared by CEIBS-CEDARS based on the CAAM database.

In 2009, there was a boom in sales due to the economic stimulus measures launched by the central government to confront the worldwide economic crisis. The plan was called “The Auto Industry Adjust and Revitalization Plan.” However, through the period of 2011 to 2015, the growth of sales has slow down for several reasons. One of the main reasons was that the government incentives started in 2009 had finished. Paradoxically, in 2011 and 2012, although sales slowed down compared to the previous year, the absolute number shows that the government incentives started in 2009 had had a real impact on the industry. This can be seen from the fact that sales did not go back to the levels that were expected without industry incentives. In addition, the measures implemented by some cities to reduce traffic congestion by means of parking charges in downtown areas and a vehicle quota system are expected to continue to affect sales.

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At the end of 2014, Shenzhen became the seventh Chinese city to establish restrictions on car registration, following the steps of Beijing, Shanghai, Guiyang, Guangzhou, Tianjin and Hangzhou. Almost all cities adopted a combined auction and lottery system to assign a limited number of car plates. The seven cities would have been able to sell a total of 3.5 million vehicles per year in 2015, but they actually sold a mere 1.5 million units due to ownership restriction, based on estimates by the China Association of Automobile Manufacturers (CAAM). An expert believes that, since the Chinese government wants to promote electric vehicles, some policies will be more common in the future, such as a policy in Beijing whereby people who buy an electric car can obtain car registration immediately, thus bypassing the lottery system. The Chinese market already has huge potential. Life expectancy is improving and the vehicle-to-population ratio7 is still very low. The vehicle population is growing rapidly among the expanding middle class due to the availability of products at competitive prices. In 2015, 60% sales went from tier-2 network (tier-2 dealers, which are in county level, functioning as garage/pop-up store pattern, without authorization from OEMs). In 2009, the Chinese market overtook the United States to become the world’s largest market for car sales. China was the world’s largest automobile market in sales for the seventh consecutive year in 2015, followed by the United States and Japan. In terms of production, in 2009, China became the biggest producer, followed by the United States and Japan.

Figure 2. Automobile sales and production of the top four countries. Source: Prepared by CEIBS-CEDARS based on the CAAM database.

Used vehicles sales in China currently account for only one-fourth of new vehicles, whereas in a mature market like the United States, nearly three times more used vehicles are sold than new vehicles. In 2014, over 6 million used-vehicles were traded in China with a total traded amount of RMB 367.565 billion. [1] Some experts claim that the secondhand market is not as relevant today as in other countries because the vehicle population is relatively new, but in the future this market could be very important and will be taken into account when people want to acquire a new car. Regulations could be a problem for the secondhand market, because in China there are currently no guarantees on secondhand cars and the market also faces legal issues.

7 Vehicle-to-population ratio = vehicle population/population.

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2.1 Capacity

The rapid expansion of Chinese automotive companies has increased the risk of overcapacity. According to recent statistics of National Development and Reform Commission (NDRC), by end of 2015 actual production capacity in China has reached 31.22 million units per annum, among which passenger vehicle production capacity is 25.75 million units and commercial vehicle production capacity is 5.47 million units. In 2015, capacity utilization of passenger vehicles was relatively reasonable and reached 81%. But commercial vehicle market is facing over capacity issue. Capacity utilization of passenger vehicles only reached 51%. To react to current capacity utilization level, NDRC required careful investment on commercial vehicle market to reduce overcapacity. In addition, NDRC also encouraged investment on new technologies and products in order to enhance capacity utilization, and encouraged resources integration by leveraging overseas production capacities. 8

Figure 3. Capacity compared to production in China. Source: Prepared by CEIBS-CEDARS based on the CAAM database. 9

Some industry experts believe that rising inventories could subsequently put pressure on prices and profitability. This dynamic represents a significant challenge for the automotive industry. Automakers will have to take it seriously as they formulate capacity expansion and manufacturing setup plans.

2.2 Production and Sales According to Forbes, auto sales are a country’s key economic indicator and give a perspective on the general health of a nation’s economy. That is why it is so important to carefully study the changes that are happening in this industry.

8 Roland Berger interview to OEM Manager, May 2016. 9 The capacity data of 2014 was not available in the CAAM database.

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Figure 4. Production compared to sales in China. Source: Prepared by CEIBS-CEDARS based on the CAAM database.

China’s entry in the WTO in 2001 was a turning point for the Chinese automotive industry, which became stronger and started to grow rapidly as the Chinese market began to open up to foreign markets. After the beginning of the global financial crisis in late 2008, the Chinese authorities moved quickly to stimulate the economy with the Auto Industry Adjustment and Revitalization Plan that began in 2009 and lasted for two years. The plan resulted in a major increase in sales that year and in 2010. The slowdown in growth in 2011 and 2012 should be understood to be due to the termination of incentives, a dip in the economy and higher gasoline prices. From 2013 to 2015, the sales kept growing in the range of 5-15% per year. This was due to the recovery of the economy and the growth of sales in the Chinese market.

Figure 5. Monthly automobile sales in China from 2006 to 2015. Source: CBUauto10 from 2006 to 2015.

10 China Business Update - Automotive.

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The continuos growth seen in the last years can be considered a sign of the Chinese’s economy strength. As Ignaci Claret, the COO of FICOSA in Asia states; the government is very attentive and every time there is a small downhill in the sales the government will react with a new measure. This has lead the industry through a stage of constant growth. Although he warns that some SOE’s companies are not making money but they are able to survive because of their links to the government and subsidies.

Figure 6. Production and sales in China in 2015. Source: Prepared by CEIBS-CEDARS based on the CAAM database.

In figure 9 it can be observed how the government’s last incentive was very effective. Carmakers recently got help when China’s government, prompted by the sharp slowdown in auto sales in 2015 first three quarters, announced a tax cuton vehicle purchases from Oct. 1 through the end of 2016. China’s purchase tax on vehicles with efficient engines 1.6 liters or smaller has been cut in half, to 5 percent. Several Chinese manufacturers believe that the only way for them to rise to the challenge in today's increasingly competitive market is to develop NEV as well as ICE vehicles. This has lead to huge investments in the Electric Vehicle as we will discuss afterwards.

Figure 7. Production and sales in China for passenger cars, buses and trucks. Source: Prepared by CEIBS-CEDARS based on the 2006-2015 CAAM database.

2.3 Exports Chinese manufacturers will continue developing internationalization strategy to expand overseas market, pursue lower cost and establish international brands. Export strategy

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is the first stage of internationalization strategy and has been largely implemented by Chinese manufactures e.g. Chery, Geely, Lifan etc. Emerging countries will be the prioritized export market for Chinese OEMs. Currently East Europe, Middle East and South America are major export markets. However, exports to East Europe and South America are expected to decrease in next years. East Europe is facing financial crisis thus market demand is shrinking, while South America recently established trading restriction policies which will impact China exports. 11 Most of China’s production has been directed at the local market. Chinese vehicles exports have been mired in a downtrend since 2013, because of geopolitical instability in countries such as Iraq and Ukraine, economic hardships caused by weak commodity prices in Chile and Brazil, higher import tariffs, quota and other trade barriers in Algeria and Brazil and worries about Chinese vehicle quality and safety.

Figure 8. Automobile domestic sales and exports in China. Source: Prepared by CEIBS-CEDARS based on the CAAM/China Customs databases.

The trend in the graphic above is very clear. While the domestic sales have performed a continuous growth the number of exports have fluctuated a lot. For instance, there was a decrease of 20% in 2015. In 2014 China exported 950,000 cars and in 2015 it only exported 750,000. The reasons that lay behind this trend are not only political crisis but also that some Chinese brands have opened factories abroad. For instance, Chery built a 200 million dollar factory in Venezuela and Lifan announced in 2015 that it would start building a plant in Russia for $300 million to produce 60,000 units a year.

Figure 9. Automobile exports in China. Source: Prepared by CEIBS-CEDARS based on the CAAM 2001-2015 databases and the China Customs 2015 database.

11 Roland Berger interview to OEM Manager, May 2016.

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30"

2001" 2002" 2003" 2004" 2005" 2006" 2007" 2008" 2009" 2010" 2011" 2012" 2013" 2014" 2015"

Millions'

Year'

Exports"

Domes6c"Sales"

!80%%

!40%%

0%%

40%%

80%%

120%%

160%%

200%%

0%

0,2%

0,4%

0,6%

0,8%

1%

1,2%

2001%2002%2003%2004%2005%2006%2007%2008%2009%2010%2011%2012%2013%2014%2015%

Million&Units&

Exports%

Growth%

Year �




18

A turning point can be observed in 2012. In that year exports began to fall after a stage of steep growht from 2009.

Figure 10. Automobile exports in China for passenger cars, trucks and buses. Source: Prepared by CEIBS-CEDARS based on the CAAM and China Customs 2015 databases.

In 2011 the volume of passenger car exports exceeded trucks’ volume, and increased the distance through the years 2012-2015, but the value of exports is still higher for trucks.

Figure 11. Automobile exports value in China for passenger cars, trucks and buses. Source: Prepared by CEIBS-CEDARS based on the CAAM 2001-2012 databases and the China Customs 2015 database.

Figure 12. Exports in units according to type of vehicle in 2002 and 2015. Source: Prepared by CEIBS-CEDARS based on the DRCNET 2002 database and the China Customs 2015 database.

0,0#

0,1#

0,2#

0,3#

0,4#

0,5#

0,6#

0,7#

0,8#

2001# 2002# 2003# 2004# 2005# 2006# 2007# 2008# 2009# 2010# 2011# 2012# 2013# 2014# 2015#

Million&&Units&

Year&

Truck#

Bus#

Passenger#Car#

0"

1"

2"

3"

4"

5"

6"

7"

2001"2002"2003"2004"2005"2006"2007"2008"2009"2010"2011"2012"2013"2014"2015"

US

D B

illio

n

Year

Truck

Bus

Passenger Car



UNITS: 17,041 UNITS: 759,113


19

We can see how the Chinese export market evolved from one in which trucks were the majority vehicle type exported in 2002 to one where passenger cars were the majority in 2015. The total number of exports in 2002 was 17,041 and in 2015 it was 759,113. 12 In 2014 and 2015, most of the exports were still to Africa, South America, the Middle East and the rest of Asia. In 2014, South America still held the first place. But the rest of Asia gained the first place and was the region that received the most China exports in 2015. Chinese OEMs will try to expand export sales; meanwhile, they are also planning for further internationalization. Many Chinese OEMs e.g. Chery, Great Wall have built up overseas assembly plants to better leverage local resources. The long term strategy is to enhance localization including local sourcing, local R&D and local production. 13

Figure 13. Exports by region in 2012, 2013, 2014 and 2015. Source: Prepared by CEIBS-CEDARS based on the China Customs database.

Asia (Excl. Middle East) export market has kept growing in the last years. In 2012 the number of exports to this region was 125,000 cars but in 2015 the number was 215,000. Chinese exports to Asia (excluding Middle East) soared by 72% during 2012-2015, because of strong demand in South Asia and Southeast Asia. Particularly, a crackdown by the Vietnamese government on a persistent problem of overloaded trucks that damage roads has helped spur demand for low-cost heavy trucks from China. On the other hand, the African market shrank drastically in the past three years a 42%. Algeria is the main culprit of the falling Chinese exports to Africa. African exports dropped by 138,071 units during 2012-2015, while Algeria alone dropped by 118.740 units. Facing weak oil prices, the Algerian government has sharply reduced car import quota and tightened dealership regulations.

12 Source based on the DRCNET 2002 database and the China Customs 2015 database. 13 Roland Berger Interview to OEM Manager in May 2016.

30%$

25%$

15%$

14%$

14%$

2%$2013%

South$America$

Africa$

Middle$East$

Asia$(Excl.$Middle$East)$

Europe$(Other)$

European$Union$

25%$

23%$21%$

12%$

12%$

3%$ South$America$

Africa$

Middle$East$


Europe$(Other)$

European$Union$

2012% �

24%$

23%$

23%$

17%$

9%$

1%$1%$ 1%$ 1%$2014%

South$America$

Africa$

Middle$East$


Europe$(Other)$

European$Union$

Central$America$and$Caribbean$Oceania$

North$America$

26%$

16%$

22%$

28%$

3%$

1%$ 2%$1%$ 1%$2015%

South$America$

Africa$

Middle$East$


Europe$(Other)$

European$Union$

Central$America$and$Caribbean$Oceania$

North$America$



20

In the early 2000s, the major destinations were mostly undeveloped countries such as Syria, Algeria and Sudan, where there was not strong competition from the local auto industry. Gradually, destinations expanded to more developed markets with stronger competition and higher quality standards, such as Australia, Romania, Brazil and Chile. In the case of Russia and Brazil, it is necessary to export in CKDs14 instead of CBUs15. The country that received most exports from China in 2015 was Iran. It imported 110,000 cars.

Figure 14. Top nine export countries for China in 2004. Source: Prepared by CEIBS-CEDARS based on the China Customs database.

Figure 15. Exports by country in 2014. Source: Prepared by CEIBS-CEDARS based on the China Customs database.

14 CKD = complete knockdown (the parts are manufactured in one country or region, then exported to another country or region for final assembly; local content from the assembling country will be used according to the localization policy). 15 CBU = completely built unit (manufactured goods for export in completely built form).

40%$

20%$

12%$

7%$

6%$

5%$

4%$4%$

2%$ Syria$

Algeria$

Vietnam$

Lybia$

Sudan$

North$Korea$

United$Arab$Emirates$

Kazakhstan$

Hong$Kong$

Iran%13%%

Algeria%9%%

Egypt%6%%

Colombia%5%%

Viet%Nam%4%%

Venezuela%3%%

KSA%3%%

Iraq%3%%

Others%39%%

Russia%7%%

Chile%4%%

Brazil%2%%

European%Union%1%%

Australia%1%%

Turkey%0%%




21

Figure 16. Exports by country in 2015. Source: Prepared by CEIBS-CEDARS based on the China Customs database.

Iran%14%%

Algeria%4%%

Egypt%5%%

Colombia%4%%

Vietnam%10%%

Venezuela%5%%

KSA%3%%

Peru%4%% Others%

40%%

Russia%2%%

Chile%5%%

Brazil%1%%

European%Union%2%%

Australia%1%%



22

2.4 Imports Because the Chinese economy opened up to foreign markets when China joined the WTO in 2001, imports into China have been growing. In 2015 the trend changed and imports fell 23%. This is due to economic slowdown; accelerated localization (foreign automakers produce more vehicles or launch new models in China through JVs); luxury brand imports hit by Chinese government’s anti-extravagancy and anti-graft campaign.

Figure 17. Automobile imports to China. Source: Prepared by CEIBS-CEDARS based on the China Customs database.

There are three turning points that need to be underlined. One of them is 2005 the second one is 2010 and the third one 2015. Some analysts believe that the drop in import growth in 2004 occurred because the vast majority of people who could buy imported vehicles did so in the first two years after China's accession to the WTO. [2] In 2005, it recovered to what should be its normal level. Besides, the sudden increase in 2010 seems to be attributed to government stimulus of the domestic industry in 2009. The import volume from 2011 to 2014 experienced an expected slowdown after stimulus, but still increased each year. However, in 2015 a big drop of imported cars took place. In the graph below, we can see that, whereas bus imports remained quite stable passenger car and truck imports have been increasing over the years. In 2014 the value of imports for the Passenger car Market was 60 USD Billion while the truck Market was over 800 million USD.

Figure 18. Automobile imports to China for passenger cars, trucks and buses. Source: Prepared by CEIBS-CEDARS based on the CAAM database.

80%$

34%$

2%$(8%$

41%$38%$30%$

3%$

93%$

28%$

9%$ 6%$

19%$

(23%$

(40%$

(20%$

0%$

20%$

40%$

60%$

80%$

100%$

200

400

600

800

1000

1200

1400

1600

2001$ 2003$ 2005$ 2007$ 2009$ 2011$ 2013$ 2015$

Thos

uand

Uni

ts

Year

Imports

Growth of imports

0"

200"

400"

600"

800"

1000"

1200"

1400"

1600"

1800"

2000"

0"

10"

20"

30"

40"

50"

60"

70"

2001" 2002" 2003" 2004" 2005" 2006" 2007" 2008" 2009" 2010" 2011" 2012" 2013" 2014"

USD$Million$

(Tuck$an

d$Bu

s)$

USD$Billion

$$(Passenger$Car)$

Year$

Passenger"Car"Truck"

Bus"




23

The 23% import decrease in 2015 (see figure 21) may be due to the devaluation of the RMB according to an industry expert. The dollar amount of imports grew steadily for passenger cars until 2009 and then showed a sharp increase from 2009 to 2014. The sharp increase in imports could have been due to several factors: there are more and more wealthy Chinese people, imported autos mean safety and high quality, and young people want the status that owning an imported auto brings. Imported cars have always faced protectionist measures. In 2016, imported electric vehicles face a 25% import tariff. Also, in December 2011, Beijing imposed additional duties on autos imported from the United States. Before these taxes, the existing ones raised the cost of U.S.-imported autos by 25%, so with the new duties it is even more expensive for Chinese drivers to buy American automobiles. The new Chinese duties will apply to sports utility vehicles and autos with engines of 2.5 liters or greater that are imported from the United States. The punitive duties were effective from December 15, 2011 to December 14, 2013. Now let's look more closely at the percentage of imports compared to domestic sales in China. It is important to note that the data are for passenger vehicles, but exclude cross passenger cars (note the PV category in the CAAM classification includes basic cars, MPVs, SUVs and cross passenger cars). In this report, we will refer to these data as PV(*). All the data were registered with the Public Security Bureau. As shown in the next graph, the share of automobile imports has stayed more or less constant compared to domestic sales in China (in the following graphs “Domestic” means sales of vehicles made in China and “Imports” means sales of imported vehicles, in CBU form). It shows that the imports have never been above ten percent of the sales.

Figure 19. Percentage of PV(*) imports/domestic sales in China. Source: Prepared by CEIBS-CEDARS based on the Chinese Ministry of Public Security database

0%#10%#20%#30%#40%#50%#60%#70%#80%#90%#

100%#

2005# 2006# 2007# 2008# 2009# 2010# 2011# 2012# 2013# 2014#

Sales&

Year&

Domes2c#Sales#

Imports#



24

II. MICRO ANALYSIS OF THE FINISHED VEHICLE INDUSTRY

According to the CAAM, by the end of 2015, there were 70 automobile manufacturing companies in China16. Chinese law does not allow foreign automobile manufacturers to establish a wholly foreign-owned enterprise (WFOE), so they must operate in China through joint ventures (JVs). Foreign investors cannot have more than a 50% equity share in these JVs and they therefore need to find a local enterprise to work with. Consequently, the Chinese industry is composed of local manufacturers and JVs between foreign and local companies. In Annex I we have included a diagram that shows the main auto companies on the Chinese market and the relationships between them, including JVs between foreign companies and local ones (located in the center of the map). Below is an overview.17 Local companies also create JVs among themselves. Automakers Map in China

Figure 20. Automaker connections in China, showing the complexity of the automotive industry. Source: Prepared by CEIBS-CEDARS based on the design of Automotive News China. Update in June 2016 with all the recent M&A.

16 This is the official number, but it does not include a limited number of small companies. 17 The original figure was from Automotive News China, and was updated by CEIBS - CEDARS in 2016.

Cumins SUZUKIDaimler

Hyundai

GM

TOYOTA

Mazda

VWFord BMW

Honda

Isuzu

Nissan

Mitsubishi

Chrysler

Peugeot-Citroen

SAICMotor

SDS

UAES

SAIC SALES

SIH

xingfu motor

NAC

Yuejin

53%

90%50%

20%

100%

50%

100%

50%

100%

SAIC74.3%

Shanghai Kolben schmitt piston

Yanfengvisteon

shanghai sunwin bus

VW Transmission

Shanghai Sachs

50%

Shanghai Valeo

50%

Shanghai GM Wuling

50.1%

Shanghai VW

50%

50%

Shanghai Huizhong

100%

Shanghai GM

51%

ZFShanghai Steering

PATAC

49%50%

Shanghai Automotive

100%

4.25%

NAC YuejinNAVECO

50%

Shanghai Jinbei Transmission

SAIC Yizheng

Shanghai Automotive

51.4%

SGM Norsom

SGM Dongyue

SGM Dongyue Power

50%50%

99%

SAIC Motor Commercial

100%

IVECO

VOLVO (AB Group) 50%

50%

34%BAIC

50%

Cumins

10%

49%

BBAC

BeiqiInvest

BeiqiMotors

50%

55.6%

100%

Beiqi Foton

Beiqi FotonCumins

50%

Beijing Foton Daimler

50%

Daimler Holdings

DaimlerInvest

Beilu Automotive 39%

BeiqiManafacture

33.3%

Beiqingqi

100%20%

BeijingHyundai

50%

GACGroup

GAC91.94%

51% GuangzhouHonda

50%

GTMC

50%

GTE

Guangzhou DenwayBus

30%

50%ZhonglongInvest

100%

GuangzhouDenwaymotorl

GuangzhouMotors

Guangzhou Isuzu Bus

25%HondaAuto (China)

100%

Dongfeng Motor

10%

WuyangHonda

50%

GuangzhouToyota

GuangzhouToyotaEngine

30%

50%

GuangzhouHino

50%

Hino 50%

FJMGSoutheast Motor

Kinglong 600686

XiamenGlodenDragon

XiamenGlodenDragon Bus

Xiamen KLM

Kinglong Suzhou

50%

19.09%

37.5% 60%

51%

60%

FAWGROUP

FAW Jilin

FAW Car

FAW-VW

FAW Jiefang

FAW linyuan

FAW Hongta

FAW BUS

FAW Sichuan

FAW Haima

FAW Foundry

47.73%100%

49%

100%

100%

FAW Changchun Light Vehicle

ChengduFAW

80% Tianjin FAW Xiali

53.03%

VW FAW Engine

40%

60%

VW FAW Sales

50%

50%

FAW Shangdong Auto Remanufacture

100%

100%

5%

75%100%

100%

100%

100%

FAW jiefang wuxi Diesel Engine

FAW jiefang dalian Diesel Engine

FAW Huali

Dalian BUS Wuxi BUS FAW Bus (chengdu)

100%100% 50%

FAW siping special purpose vehicle

Fawer Automotive parts

FAW Harbin light vehicle factory

FAW changchun Fengyue

100%

31.57%

100%

100%FAW special purpose vehicle

FAW Sichuan special purpose vehicle

100%

25%

FTMS

38%

FAW-GM Light vehicle

50%

TFTM

20%

SFTM

30%

50%

25%

FMMS

5%

70%

100% 100%

DFG 50%Dongfeng Electric Vehicle

36.44%

DongfengHondaParts

44%

Dongfeng \HondaEngineDongfeng

Honda

50%50%

Dongfeng PeugeotCitroen

50%

DF Nissan Disell

50%

JMCHolding

JMC50%

JMC Motor

Group

CCAG

50%

31%

41.3%

JMCNew powerJMC

Remanufacture

JMC Special PurposeVehicle

100%51%

100%

100%

25%

20%

DFM

DYK

DCDDongfeng Yuan

66.86%

DFL

BrillianceAuto

BM\WBrilliance

BrillianceJinbei

Jinbei

51% 49%

50%

DongfengMotor600006

DF NissanPassengervehicle

DFMC Parts and Components

DFMCEquipment

DCVC

DET

DF Xiangfan

DF Changzhou

DF Yutong

DCEC

ZhenzhouNissan

Automarkers in China

90%

83.33%

51%

5%

51%

65%

100%

100%

50%

70%

100%

50%

49%

34%

50%

FAW Qingdao

30%

60%

25%

JACJAC600418

Ankai000868

JACCoaches

28.12%

43.45%

50%

50%

45%

32%

48%

65%

50%

50%

49%

50%

70%

50%

50%

36%

Dongan dongli

HaerbinAutoGrop

Dongan Mishubishi

Changhe SUZUKI

19%

100%

51.41%

10%

MG-Rover KIA

50%

ChanganAuto

45.55%

ChangansuzukiChangan

FORD MAZDA

JMC Holding

Nanjing ChanganChangan

jinling

ChanganFORD MAZDA engine

HeibeiChangan

50%

93.45%

83.22%

51%50%50%100%

50%

50% 50%

50%

30%

35% 15%

45%

49%

50%

FIAT Mitsubishi

GuangzhouFIAT

50%

GACMitsubishi

50%

50% 50%

JiangxiIsuzu

50%

50%


25

1. The Main Players on the Chinese Market Depending on what is highlighted, there are different ways to classify car manufacturers: by origin, shareholder nationality, headquarter location and sales location. In this report, in order to simplify the situation, we have divided the auto manufacturing industry into two large groups according to the nationality of enterprise ownership: local companies and foreign companies that collaborate with local companies to form joint ventures. The following figure shows how these main players are related. In this report we will refer to these local companies as Chinese companies. Joint Venture Creation

Figure 21. Example of the joint venture operations in China. Source: Prepared by CEIBS-CEDARS.

Recently, largely due to government requirements, JVs have also appeared on the Chinese automotive market under the name of a new brand with the corresponding association, but with a more local overview (for example, "Venusia," the Chinese name Nissan gave its new brand with Dongfeng Motor). It is very important to point out that a foreign company can only manufacture in China through the creation of a JV. Furthermore, each Chinese company is able to create several JVs, whereas foreign companies are not allowed to have more than two. Consequently, some major local and foreign companies are manufacturing different brands at the same time. For example, VW is currently working with two Chinese partners (SAIC and FAW). Each of these companies is independent and has its own factories and work methodology (SAIC-VW and FAW-VW) and the pure VW import company is not involved. Furthermore, these two local partners also manufacture their own wholly Chinese brands and operate other JVs with different foreign manufacturers: FAW with Mazda, Toyota and General

!!

GM#$SAIC$

VW$#$SAIC$

VW$#$FAW$

TOYOTA$#$FAW$

PEUGEOT$#$DFM$

NISSAN$#$DFM$

GM#$FAW$

etc…$©$CEIBS,$Shanghai$2016


26

Motors; SAIC has two JVs with General Motors. This way of working can sometimes be confusing, since the knowledge shared and management decisions are not always clear. These difficulties may sometimes bring about lower brand performance and even problems executing certain strategies. More can be learned about them and their relationships in Annex I: Relations Between Foreign and Chinese Automobile Manufacturers. According to an expert, getting closer to the JV partner and collaborating more deeply and effectively is one way that both foreign players and Chinese companies could enhance their profits. He notes, for example, that opportunities may exist for foreign OEMs to open market access to their JV partners for growth outside China. In the medium to long term, we could see Chinese cars being exported to and sold in overseas markets with the assistance of foreign OEM JV partners. Similarly, we may see foreign OEMs and their JV partners investing overseas together to open up or develop relatively new markets such as Indonesia. If we focus on passenger vehicle production for China, we can see the importance of JVs on the Chinese market, since the number of passenger vehicles produced by them in 2015 was around 12.4 million, whereas Chinese companies produced around 8.7 million. The graph below compares production by JVs with production by Chinese companies and the total number of vehicles imported. The graph shows that the number of passenger vehicles produced by JVs was always a little higher than the number produced by Chinese companies, while the number of imports was much smaller.

Figure 22. Passenger vehicle production (JVs, Chinese companies and imports) on the Chinese market. Source: The CAAM and prepared by CEIBS-CEDARS.18

18 Import data are only available since 2001.

0"""

5"""

10"""

15"""

20"""

25"""

1998" 1999" 2000" 2001" 2002" 2003" 2004" 2005" 2006" 2007" 2008" 2009" 2010" 2011" 2012" 2013" 2014" 2015"

Vehicles((M

illions)(

Years(

Total"Importa5ons"

Joint"Ventures"

Chinese"Companies"



27

2. Chinese Companies The Chinese auto market has become a very important part of China’s economy. In recent years, local production has seen steep growth. At the same time, JVs have also increased their production for China. The following graph shows the trend of passenger vehicle production in China and compares Chinese companies with JVs, while noting their respective origins.

Figure 23. Passenger vehicle production for the Chinese market. Source: The CAAM and prepared by CEIBS-CEDARS.

The following graph shows the percentage of 2015 sales by group companies, i.e., not only by name brand, but also taking into account all other sales under their supervision. Therefore, sales of foreign and Chinese brands are included in the same group. For example, DFM sales refer not only to the local DFM brand, but also to joint brands with PSA, Honda, etc., as well as Chinese brands such as Fengshen.

Figure 24. 2015 Group ranking based on sales (vehicle units). Source: Prepared by CEIBS-CEDARS based on the CAAM database.19

The three largest Chinese group companies, SAIC, FAW and DFM, have a long history on the Chinese market. They consequently have over 50% of the market share in China. All three are supported by the government and are mainly focused on the domestic market, although DFM also exports a significant number, as discussed below. They have a good

19 Sales also include export numbers.

0"

1"

2"

3"

4"

5"

6"

7"

8"

9"

1998"

1999"

2000"

2001"

2002"

2003"

2004"

2005"

2006"

2007"

2008"

2009"

2010"

2011"

2012"

2013"

2014"

2015"

Vehicles((M

illions)(

Year(

Chinese"Companies"

JVs"of"Japanese"Origin"

JVs"of"European"Origin"

JVs"of"American"Origin"

JVs"of"South"Korean"Origin"

25%$

16%$

12%$12%$

10%$

5%$

4%$4%$

2%$ 2%$2%$2%$1%$ 1%$ 1%$ SAIC%Motor% DFM%

FAW%Group% CCAG%BAIC%Group% GAC%Group%Brilliance% Greatwall%JAC% Geely%Chery% BYD%Lifan% Zotye%CNHTC% Haima%FJMOTOR%




28

dealer network and their main objective is to develop high- and medium-end autos for the Chinese market.

Group Ranking

Sales Rankin

g Group Global Brands Chinese Brands

Sales(K.U.) Year 2015 Share Var.

Total Industry 24,598 100.00% 4.68%

1 SAIC Motor

5,863 23.84% 5.01%

2 DFM

3,875 15.75% 1.87%

3 FAW Group

2,844 11.56% -7.85%

4 CCAG

2,777 11.29% 8.98%

5 BAIC Group

2,489 10.12% 3.67%

6 GAC Group

1,301 5.29% 10.94%

7 Brilliance

856 3.48% 6.79%

8 Greatwall

853 3.47% 16.68%


29

Sales Rankin


Sales(K.U.)

Year 2015 Share Var.

9 JAC

588 2.39% 26.51%

10 Geely

562 2.28% 29.79%

11 Chery

518 2.11% 6.53%

12 BYD

450 1.83% 2.25%

13 Lifan

276 1.12% 18.26%

14 Zotye

223 0.91% 34.07%

15 CNHTC

158 0.64% -10.17%

16 Haima

111 0.45% 18.78%

17 FJMOTOR

105 0.43% 7.30%


30

Sales Rankin


Sales(K.U.)

Year 2015 Share Var.

18 KLM

93 0.38% 3.49%

19 SHACMAN

85 0.35% -20.13%

20 Qingling

84 0.34% 0.73%

Others 488 1.98% Figure 25. Domestic-selling Chinese group brands, specific data for 2013. Source: Prepared by CEIBS-CEDARS-IESE.

DFM= Dongfeng Motor Corporation; FAW= First Automobile Works; BAIC= Beijing Automotive Industry Corporation; CCAG= China Changan Automobile Group; GAC Group= Guangzhou Automobile Group Co., Ltd.; JAC= Anhui Jianghuai Automobile Co., Ltd. As Mr. Jia, a CEIBS alumni working for BestCar sales points out there a number of reasons why the sales ability and the whole new car marketing system must sink into tier-3/4/5 market. The first reason is that channel sinks. 4s stores20 declining sales demand them to distribute the surplus to tier-2 network, then sinks further to tier-3 tier-4 and tier-5 market21. The second one is that demand of consumers sinks. As the purchase limitation policy in tier 1 and tier 2 cities being implemented, demand of consumers from these cities can’t be met due to the scarcity of car licenses. But, looking at the county and town market in China, over 95% villages there have been connected with roads, while 96% families haven’t had any vehicles. This particular group of consumers tends to regard auto as the symbol of position and identity, therefore the demand to purchase is rigid. So there might be an opportunity for both Chinese companies and Joint ventures in this new market.

20 4S Stores are authorized to sell vehicles by the vehicle manufacturers. Four in One refers to the four functions of the shop. 4S stand for sales, sparepart, service and survey. 21 China’s city classification uses the term tier. Tier 1 cities are Shanghai, Beijing, Shenzhen and Guangzhou. Tier 5 cities are very small cities.


31

2.1 The 15 Main Chinese Players The figure shows the 15 main Chinese players:

Figure 32. 15 main Chinese players. Source: Prepared by CEIBS-CEDARS.

The locations of the production plants around the world of some of the 15 main Chinese players are shown in Annex IV: Overview of the Location of the Production Centers/Offices of the Main Chinese Players. The following table shows some data on the 15 main Chinese players ranked according to production in 2015:


32

Figure 26. 15 main Chinese player data. Source: Prepared by CEIBS-CEDARS.

Company Established Headquarters Products7&7Segments 20157Production

Joint7Venture7Partner7

Ownership

SAIC 1978 ShanghaiPassenger,3Commercial3

(Truck3and3Bus)5.863.4973 YES stateGowned

DFM 1969Wuhan3City,33333333333333333

Hubei3provincePassenger,3Commercial3

(Truck3and3Bus)3.874.5683 YES stateGowned

FAW 1956Chuangcun3City,33333333333333333Jilin3province

Passenger,3Commercial3(Truck3and3Bus)

2.843.7743 YES stateGowned

CCAG 1983Chongqing3City,33333333333333333Sichuan3province

Passenger,3Commercial3(Truck3and3Bus)


BAIC 2010 BeijingPassenger,33333333333333333

Commercial3(Truck3and3Bus)


GUANGZHOU3AUTO

2005Guangzhou3City,3Guangdong3province

Passenger,33333333333333333Commercial3(Truck3and3

Bus)1.300.5673 YES stateGowned

BRILLIANCE 2002Shenyang3City,33333333333333333

Liaoning3province


Bus)856.0673 YES stateGowned

GREAT3WALL 1984Baoding3City,33333333333333333Hebei3province

Passenger,33333333333333333Commercial3(Pickup)

852.6933 NO private

JAC 1999Hefei3City,33333333333333333

Anhui3province


Bus)587.9433 NO stateGowned

GEELY 1997Hangzhou3City,33333333333333333

Zhejiang3province

Passenger 561.8533 YES private

CHERY 1997Wuhu3City,33333333333333333

Anhui3province


Bus)517.7973 YES stateGowned

BYD 1995Shenzhen3City,3Guangdong3province

Passenger,33333333333333333Commercial3(Bus)

450.2883 YES private

LIFAN 1992Chongqi3City,33333333333333333

Sichuan3provincePassenger,33333333333333333

Commercial3(Truck)276.1143 NO private

Zotye 2003Yongkang3City,3

Zhejiang3province

Passenger 222.8993 NO private

SINOTRUK 1956Jinan3City,33333333333333333Shandong3province

Commercial3(Truck,3Bus) 158.1743 NO stateGowned


33

We would like to point out that only five of the 15 main players, namely, Great Wall, JAC, Lifan, Zotye and Sinotrunk do not have a JV with a foreign brand. Except for SAIC, FAW and DFM, all the other Chinese companies are younger and some are more independent. Some are state-owned and some are private. Chinese entrepreneurs started most of the private ones. In the past, these Chinese companies did not have a good brand image, but this is now changing. Their associations in powerful joint ventures have made them stronger on the market. The graph below shows the most important Chinese companies (without taking into account JVs) involved in passenger vehicle production.

Figure 27. Chinese brand passenger vehicle production. Source: Prepared by CEIBS-CEDARS. 22

22 SAIC production data also include Wuling units.

0"""

1"""

2"""

3"""

4"""

5"""

6"""

7"""

8"""

1998" 1999" 2000" 2001" 2002" 2003" 2004" 2005" 2006" 2007" 2008" 2009" 2010" 2011" 2012" 2013" 2014" 2015"

Vehicles"(M

illions)�

Others"

Lifan"

GAC"Group"

JAC"

GWM"

Brilliance"

DFM"

BYD"

Geely"

FAW"Group"

CCAG"

Chery"

SAIC"Motor"



34

2.2 SWOT Analysis of the 15 Main Chinese Players In Annex III, we have included a SWOT analysis of each of the 10 main players that shows the main characteristics of the top 10 Chinese companies. The common points they share are indicated in the following general SWOT of the 15 main Chinese players.

Figure 28. SWOT for Chinese companies. Source: Prepared by CEIBS-CEDARS.

Strengths:

1. Chinese companies receive government support. The automotive industry in China was included as one of the "pillar industries," which means that the government has supported particular policies for the automotive industry. Many examples of these policies can be found in the Auto Industry Adjustment and Revitalization Plan of 2009. At the end of 2011, the new energy-efficient vehicle policy came out with new rules for automobile energy subsidies. The military has also started purchasing domestic-branded vehicles exclusively.

2. Low cost of labor, auto parts and R&D in China. Labor costs in China are low, which affects auto parts and finished vehicles. Furthermore, R&D in China is much cheaper than in Western countries. The advantages of labor costs in China also greatly reduce the cost of parts. A 2015 survey by the China Youth Daily shows that the average monthly salary at different Chinese automakers falls in between around

Strengths

1. Chinese government support 2. Low cost of R&D, labor and parts 3. Quick response to domestic market 4. Strong competitiveness in Truck & Bus 5. Advantages of JV cooperation

Weakness

1. Management capacity 2. Product quality 3. Brand image 4. Weak technology & development 5. Incomplete legal and regulations system

Opportunities

1. Huge growth potential of Chinese market 2. Increasing investment in overseas market 3. Similar starting point for EVs 4. Industry consolidation and M&A 5. Freer and fairer policy environment

Threats

1. Fierce competition from foreign brands 2. Trade barriers & currency headwinds 3. Cost increase of raw materials 4. Tightening fuel economy & emission standards 5. Possible cancelation of 50:50 JV policy



35

3,800-12,000 RMB (or 613-1,935 USD), with workers at joint ventures generally paid better than Chinese firms.

3. Quick response to the domestic market. Companies know their own market well

and are able to respond quickly.

4. Competitive truck and bus market. Chinese enterprises are still the leaders in both the bus and truck markets in China due to their low prices and use of local parts.

5. Advantages of JV cooperation. It shortens the learning curve and subsidizes

Chinese companies’ development. When Chinese companies cooperate with foreign enterprises, they have more opportunities to learn and benefit from the transfer of foreign technology.

Weaknesses

1. Management capacity. Because China has a shorter history in the market economy and less experience in the passenger vehicle business, its management capacity is still a commonly acknowledged weak area.

2. Product quality. Standards in the United States and the European Union are very demanding. It is difficult for Chinese auto manufacturers to export there because of the lower quality of China’s automotive production. However, if the quality of foreign and domestic companies is compared, it can be seen that quality is improving quickly in China. Although quality is still lower than in foreign companies, the gap has been reduced considerably. In year 2014, the Chinese brands averaged 131PP100, the global brands averaged 95PP100, so the gap was 36PP100. In 2015, the Chinese brands averaged 120PP100, the global brands averaged 98PP100, so the gap was 22PP100.

Figure 29. Product quality difference between Chinese brands and global brands from 2000 to 2013. Source: JDPower. Note that the real data of 2014 and 2015 is included in the description above.

3. Brand image. The consumer perception of Chinese brands is low. J.D. Power

reports show that only about 20% of consumers in China intended to purchase a Chinese car during the years of 2009-2014.


36

4. Weakness of technology and development. Chinese top automaker SAIC spent 8.4 billion RMB in research and development activities in 2015, up 23% from a year ago; however, it still lagged far behind VW (101 billion RMB), Toyota (61 billion RMB) and Daimler (50 billion RMB).

5. Incomplete legal and regulatory systems result in multiple authorities interfering in companies’ management. China’s small and medium-sized automobile companies are too reliant on government support.

Opportunities

1. Huge growth potential of the Chinese market. China sold 24.6 million vehicles in year 2015 and the market will peak at around 40 million units, based on estimates by Mr. Dong Yang, executive vice-chairman of the China Association of Automobile Manufacturers. Urbanization and rising income are two key factors contributing to this phenomenal growth.

2. Increasing investment in overseas market. BYD launched an electric bus

assembly facility in California in April 2014; SAIC’s joint venture with Thailand’s CP Group launched production in June 2014; Chery’s US$400 million Brazilian base went into production in late 2014; Great Wall and Lifan started constructing their Russian plants in July/September 2015 respectively. Chinese automakers are accelerating overseas expansion to meet global demands.

3. Similar starting point for EVs. EVs seem to be a real alternative to the internal combustion engine. Thus, BYD, the biggest rechargeable battery supplier in the world for cell phone manufacturers, leads the Chinese EV sector.

4. Industry consolidation and M&A. The Chinese government’s ongoing effort to

phase out those “zombie” small automakers will benefit the existing top players.

5. Freer and fairer policy environment. More open-mindedness and increasingly more democratic policies foster an environment of fairer competition that will produce powerful companies, especially private ones.

Threats

1. Fierce competition from foreign brands as they accelerate their expansion in China. In recent years, foreign brands have decreased their prices and launched smaller-size vehicles on the market, which is a serious threat to the Chinese brands in the mid-range and lower segments.

2. Trade barriers & currency headwinds on the export market. For example:

• In Brazil, taxes on Chinese cars were raised by 30% because these vehicles do not comply with the requirement of having 65% local content.

• Russian tariff regulations have almost banned imports of Chinese CBUs. Exports to Russia from China must be in CKD form instead of CBUs or SKDs, as before.23

• Since 2005, the RMB has been appreciating against the dollar. The exchange rate to the dollar decreased from 1 dollar=8.1 RMB in 2005 to 1 dollar=6.67 RMB in 2016 and this is damaging the competitiveness of Chinese exports.

23An incomplete kit is known as SKD for semi-knocked-down.


37

3. The cost increase in raw materials, which causes production costs to rise. Another economic threat is increasing labor costs. Migrant worker wages have risen by 30% to 40%. According to a Japanese forecast, by 2023, Chinese wage levels will be higher than in Japan.

4. Tightening fuel economy & emission standards. Eleven Chinese provinces have

started implementing Euro V emission standard for gasoline powered light vehicles since April 2016, and all other provinces will do so from next year. Meanwhile, China vows to cut the corporate average fuel economy from 6.9L/100km in 2015 to 5.0L/100km by 2020. These stringent regulatory measures will be a burden to automakers.

5. Possible cancelation of 50:50 JV policy. China's government is considering the

removal of a 50% cap on stakes foreign carmakers can own in joint ventures with local partners, potentially loosening a policy criticized for shielding state-owned companies from competition. China has mandated that foreign players enter joint ventures with domestic partners to operate in the country since 1994.


38

2.3 2020 Plans and Strategies of the 15 Main Chinese Players

Business Strategy: Roewe & MG brands to roll out 24 new models; co-develop engines with GM.

2015 Sales (k.u.): 5,863

2020 Sales (k.u.): -

2015 – 2020 C.A.G.R: -

Sales of NEVs (k.u.): 600

Sales of Chinese Brands (k.u.): 1,000

Exports of Chinese Brands (k.u.): 200-300

Business Strategy: Dongfeng brand will sell 1 million CVs and 1 million PVs.

2015 Sales (k.u.): 3,875

2020 Sales (k.u.): 5,600

2015 – 2020 C.A.G.R: 7,7%



Exports of Chinese Brands (k.u.): 300

Business Strategy: Besturn, Xiali, Jilin and Hongqi brands to alunch 18 new models.

2015 Sales (k.u.): 2,844

2020 Sales (k.u.): 4,500-5000

2015 – 2020 C.A.G.R: 9,6-11,9%



Exports of Chinese Brands (k.u.): -

Business Strategy: Changan aims at world top 12 brand; plan 34 EV models by 2025.

2015 Sales (k.u.): 2,777

2020 Sales (k.u.): 4,400

2015 – 2020 C.A.G.R: 9,6%





39

Business Strategy: Become a world 12 player and a top 3 Chinese brand.

2015 Sales (k.u.): 2,489

2020 Sales (k.u.): 4,500

2015 – 2020 C.A.G.R: 12,6%


Sales of Chinese Brands (k.u.): -


Business Strategy: Trumpchi brand to develop about 20 new models, improve quality.

2015 Sales (k.u.): 1,301

2020 Sales (k.u.): 2,400

2015 – 2020 C.A.G.R: 12,0%




Business Strategy: Focus on three brands (Brilliance, Jinbei and Huasong); partner with BMW

2015 Sales (k.u.): 856

2020 Sales (k.u.): 1500

2015 – 2020 C.A.G.R: 11,9%

Sales of NEVs (k.u.): -



Business Strategy: Haval to be among world top 3 SUV brands; build high-end & smart vehicles

2015 Sales (k.u.): 853

2020 Sales (k.u.): -

2015 – 2020 C.A.G.R: -





40

Business Strategy: Regain No.1 Chinese brand status; to launch 5 new EVs and 10 gas cars

2015 Sales (k.u.): 518

2020 Sales (k.u.): -

2015 – 2020 C.A.G.R: -


Sales of Chinese Brands (k.u.):-


Business Strategy: Global EV industry leader ("7+4" & "542" initiatives)

2015 Sales (k.u.): 450

2020 Sales (k.u.): -

2015 – 2020 C.A.G.R: -

Sales of NEVs (k.u.): 90% of total sales


Exports of Chinese Brands (k.u.): 200-300

Business Strategy: Become China's top EV brand for commercial vehicles

2015 Sales (k.u.): 588

2020 Sales (k.u.): -

2015 – 2020 C.A.G.R: -

Sales of NEVs (k.u.): 20% of total sales



Business Strategy: Become a world top 10 player; partner with Volvo; "Blue Geely"

2015 Sales (k.u.): 562

2020 Sales (k.u.): 2000

2015 – 2020 C.A.G.R: 31,4%





41

Business Strategy: To launch 21 EV products and build 500 energy stations in China

2015 Sales (k.u.): 276

2020 Sales (k.u.): -

2015 – 2020 C.A.G.R: -

Sales of NEVs (k.u.): 500 (2015-2020)



Business Strategy: To develop six model series including gasoline, BEV and PHEV variants

2015 Sales (k.u.): 223

2020 Sales (k.u.): 800

2015 – 2020 C.A.G.R: 29,1%




Business Strategy: Chinese HD truck industry top 3 player; enter developed countries24

2015 Sales (k.u.): 158

2020 Sales (k.u.): -

2015 – 2020 C.A.G.R: -




24 Source of the 2020 plans & Strategies of the 15 Main Players: Media Report.


42

2.4 History of the Main Chinese Players At the beginning of this report, we mentioned that the history of the automotive industry in China is mainly linked to the history of three companies: SAIC, FAW and DFM. In this chapter, we will summarize the milestones of other major Chinese players: JAC, Great Wall, BYD Auto, Foton, Chery and Geely. We believe the history of these companies is relevant when it comes to understanding the history and development of the automotive industry in China. Two of the oldest companies are JAC and Great Wall, which were established in 1964 and 1984, respectively. There was also a major trend to set up automobile manufacturing companies in the mid-1990s. Since then, these companies have all made progress by expanding throughout the world and creating joint ventures. The following table shows the milestones of these companies.

©"CEDARS,"Shanghai"2016

2015

★Chery*debuts*Arrizo*5*sedan*and*launches*M7*MPV

★GWM*breaks*ground*on*Russian*plant★GWM*launches*H8*SUV*and*H6*Coupe

★Geely*announces*NEV*strategy★Geely*opens*auto*financing*firm★Geely*partners*with*Zhidou

★BYD*launches*Tang*and*Song*SUVs★BYD*announces*“7+4”*NEV*strategy

★JAC*announces*“iEV+”*NEV*strategy★JAC*launches*S2*SUV

★Foton*launches*KD*plant*in*Colombia

2014

★Chery*launches*Arrizo*3*sedan★Chery*inaugurates*Brazilian*plant

★GWM*launches*new*Haval*H1/H2/H9*SUVs

★Geely*returns*to*one\brand*strategy★Geely*debuts*Borui*GC9*midsize*sedan

★BYD*launches*S7*SUV*and*G5*sedan★BYD*announces*“5\4\2”*NEV*strategy

★JAC*launches*S3*SUV★Foton*and*Cummins*jointly*unveil*Auman*GTL*truck

2013

★Chery*returns*to*'one*brand*'*strategy**********★Chery*buidls*strategic*alliance*with*GAC***************************★Chery*announces*vehicle*recall*in*Australia

★Great*Wall*opens*KD*plant*in*Bulgaria

★Geely*opens*KD*plant*in*Egypt******************************★Geely*signs*technology*transfer*deal*with*Volvo

★BYD*and*Daimler*announce*DENZA*Brand*********★BYD*launches*all\new*F5*Suri

★JAC*unveils*two*passenger*car*sub\brands*(Ruifeng*and*Heyue)***************************★JAC*inaugurates*engine*JV*with*Navistar******************★*JAC*breaks*ground*on*Brazil*JV

★Foton*and*Daimler*establish*JV

2012

★RICH*M1*EV*is*launched.★March*26,*2010:*CHERY's*car*number*2,000,000*is*rolled*off*the*assembly*line.★CHERY*builds*a*plant*in*Brazil*and*has*16*overseas*production*bases.

★Geely*opens*online*car*store*on*Taobao.

★JAC*signs*a*joint\venture*project*with*an*American*company*for*engine*production.★J3*is*launched.

2011

★CHERYexceeds*500,000*units.********************************★July*27,*2011:*CHERY's*car*number*3,000,000*is*rolled*off*the*assembly*line.**

★Italy*orders*2,000*Wingle*pickups.★Great*Wall*starts*production*at*Senegal*KD*factory.*

★Gleagle*GC7*makes*its*first*appearance*in*Changsha.

★JAC*enters*Brazil*with*the*Shuailing*3*and*Refine*2.

★FOTON*signs*an*agreement*for*investment*in*India.

2010

★RICH*M1*EV*is*launched.★March*26,*2010:*CHERY's*car*number*2,000,000*is*rolled*off*the*assembly*line.★CHERY*builds*a*plant*in*Brazil*and*has*16*overseas*production*bases.

★Geely*opens*online*car*store*on*Taobao.

★JAC*signs*a*joint\venture*project*with*an*American*company*for*engine*production.★J3*is*launched.


43

Figure 30.Milestones in the history of some other major Chinese brands. Source: Prepared by CEIBS-CEDARS.

©"CEDARS,"Shanghai"2016

2009

★RICH%X1,%G5%and%M1%are%launched.★CHERY%S18%(M1)%purely%electric%vehicle%is%rolled%off%the%assembly%line.%%%%%%%%%%★April%21,%2009:%CHERY%Automotive%Finance%Industry%holds%its%opening%ceremony.%

★Great%Wall%Automobiles%are%formally%exported%to%Australia%and%500%overseas%networking%companies%are%created.

★The%England%TX4%classic%commercial%vehicle%makes%its%first%national%IPO.

★J5%RS%is%rolled%off%the%assembly%line.

★FOTON%signs%a%sales%cooperation%agreement%with%Daimler%AG%in%Berlin,%Germany.

2008

★The%first%Chinese%automobile%brand%is%launched%on%the%Argentinean%market.★The%company's%eighth%overseas%factory%formally%begins%operating%in%Malaysia.%%%%%%%%%%%%%%%%%%%%%%%%%%%%%★Chery%Automobile%formally%enters%the%Turkey%and%Thailand%markets.★A3%is%launched.

★Great%Wall%develops%the%2.5TCI%diesel%engine%in%cooperation%with%Bosch.

★Warren%Buffett%invests%in%BYD.

★J7%is%rolled%off%the%assembly%line.

★FOTON%builds%China's%first%new%energy%automobile%design%and%manufacturing%base.★FOTON%announces%joint]venture%partnership%with%Cummins%to%create%the%largest%domestic%engine%manufacturing%enterprise.

2007

★CHERY%establishes%a%CKD%joint%venture%with%IRAN%KHODRO,%Iran's%largest%automotive%group,%and%SOLITAC,%a%Canadian%company%in%Iran,%and%signs%a%joint%venture%operations%project%with%the%Argentinean%SOCMA%Group.★RICH%2%is%launched..★August%22,%2007:%CHERY's%car%number%1,000,000%is%rolled%off%the%assembly%line.

★Geely%CK]1%CKD%assembly%is%officially%started%in%Indonesia.

★BYD's%India%Branch%is%established.★BYD%formally%signs%a%cooperation%agreement%on%car%exports%with%auto%traders%in%Portugal%in%Europe,%Angola%in%Africa,%and%Cape%Verde.

★FOTON%officially%announces%its%completion%of%the%energy]saving%and%emission]control%center.

2005

★Tiggle%3%is%launched.★The%first%ACTECO%engine%is%rolled%off%the%assembly%line.

★July%1,%2005:%Great%Wall%announces%the%start%of%construction%to%build%a%production%base%for%200,000%cars%(three%phases).★March%6,%2005:%GW%announces%the%completion%of%a%production%base%for%100,000%cars.★Harvard%is%put%into%production.

★Geely%is%successfully%listed%in%Hong%Kong.%%%%%%%%%%%%%%%%%%%%%%★Geely%CK%is%successfully%rolled%off%the%assembly%line%in%Ningbo%at%the%Zhejiang%Geely%Motor%Assembly%Plant.

★F3%is%formally%rolled%off%the%assembly%line.★BYD's%Japan%branch%is%established.

★Italy%Research%and%Development%Center%is%founded.

2003

★Cowin,%Eastar%and%QQ3%are%launched.★March%1,%2003:%CHERY's%car%number%100,000%is%rolled%off%the%assembly%line.

★Hong%Kong%IPO.★The%first%batch%of%Geely%cars%is%exported%to%overseas%markets.

★BYD%purchases%Qinchuan,%Xian%Auto%Limited%Liability%Company.

★Gallop%heavy%truck%is%rolled%off%the%assembly%line.

2002

★BYD%is%listed%on%the%main%board%of%Hong%Kong.%%%%%%%%%%%%%★BYD%obtains%QS]9000%certification.%%%%%%%%%%%%%%%%%%%%%%%%%★BYD's%Hong%Kong%branch%is%established.

★Refine%is%rolled%off%the%assembly%line.

2001

★CHERY's%first%brand]new%car%is%launched.★The%first%10%cars%are%exported%to%Syria.★June%16,%2001:%CHERY's%car%number%10,000%is%rolled%off%the%assembly%line.

★Production%begins%on%the%Great%Wall%Sailor%pickup%truck.

★South%Korean%office%is%established.

★Shanghai%IPO%(initial%public%offering).

2000

★June%18,%2000:%Great%Wall%Internal%Combustion%Engine%Manufacturing%Company%Limited%is%established.%GW%becomes%the%first%company%to%own%core%power%in%the%field%of%self]owned%brands.%%%%

★BYD%becomes%a%supplier%of%MOTOROLA.


44

Historically, each region in China has developed its own auto manufacturing company, as shown in the figure below. Some Chinese companies even have the name of the region in their logo or brand, as in the case of SAIC: Shanghai Automotive Industry Corporation. For the regions, it was very important to develop their own brand identity as a way of competing and marketing themselves. However, since China has many provinces, there are now too many Chinese car manufacturers. The fact that local governments protect companies from their own provinces has not helped to consolidate the industry. A few of these companies have gone out of business or have simply been merged with more powerful ones. In fact, the aim of central the government is to promote industry consolidation. As the industry matures, the number of companies will decrease. The following map and table show the regions of origin of each of company.

Figure 31. Historical origin map of the main Chinese companies. Source: Prepared by CEIBS-CEDARS.

1

2

3

4 5 6

7

8

10

11

12

14 20

15

16 17

13

18

19 22

23

21

25

1- Anhui

2- Beijing

3- Chongqing

4- Fujian

5- Guangdong

6- Guangxi

7- Guizhou

8- Hebei

9- Heilongjiang

10- Henan

11- Hubei

12- Hunan

13- Inner Mongolia

14- Jiangsu

15- Jiangxi

16- Jilin

17- Liaoning

18- Shandong

19- Shanghai

20- Shanxi

21- Shaanxi

22- Sichuan

23- Tianjin

24- Yunnan

25- Zhejiang

9

24

©"CEIBS,"Shanghai"2016""


45

Province Chinese Brand City

1. Anhui

JAC Hefei

CHERY Wuhu

COWIN Wuhu

CAMC Ma’anshan

2. Beijing

BAIC Beijing

FOTON Beijing

HAWTAI Beijing

BAW Beijing

WEIWANG Beijing

3. Chongqing

CHANGAN Chongqing

LIFAN Chongqing

HENGTONG Chongqing

YINXIANG Chongqing

4. Fujian

SOUEAST Fuzhou

KINGLONG Xiamen

NLM Longyan GOLDEN DRAGON Xiamen

5. Guangdong

GAC Guangzhou

BYD Shenzhen

6. Guangxi WULING Liuzhou

GUILIN BUS Guilin

7. Guizhou YOUTH Anshun

8. Hebei ZX Baoding

GREAT WALL Xingtai

9. Heilongjiang HAFEI Harbin

10. Henan

HAIMA Zhengzhou

YUTONG Zhengzhou

HAIMA Zhengzhou

YTO Luoyang

SHAOLIN Zhengzhou

11. Hubei

DONGFENG Wuhan

SANJIANG Wuhan

SANHUAN Shiyan

12. Hunan

ZOYTE Xiangtan

ZOOMLION Changdejin

SANY Shangsha 13.Inner Mongolia BEIBEN Baotou

14. Jiangsu

YAXING Yangzhou

CMG Nanjing

QOROS Changshu

HIGER Suzhou

15. Jiangxi

JINMA Nanchang

JMC Nanchang

BONLUCK Nanchang

CHANGHE Jingdezhen

LANDWIND Nanchang

16. Jilin FAW Changchun

17. Liaoning

BRILLIANCE Shenyang

SG Dandong

JINBEI Shenyang

HUASONG Shenyang

18. Shandong

SINOTRUK Jinan

ZHONGTONG Liaocheng

T-KING Zibo

19. Shanghai SAIC Shanghai

20. Shanxi

SHACMAN Xian

TONGJIA Baoji

Silver Xi’an

21. Shaanxi DAYUN Yuncheng

22. Sichuan CNJ Ziyang

YEMA Chengdu

23. Tianjin XIALI Tianjin

24. Yunnan YUNNAN JINMA Kunming

25. Zhejiang GEELY Hangzhou

YOUNGMAN Jinhua Figure 32. Historical origin of the main Chinese companies (provinces and cities). Source: Prepared by CEIBS-CEDARS.


46

2.5 Location of the 15 Main Players If we take a look at the origins of the main companies, we can see that they are located in the clusters of Changchun, Tianjin, Beijing, Wuhan, Chongqing, Guangzhou and Shanghai. Despite this fact, they are expected to be concentrated in four key geographic areas: the Shanghai area (including Jiangsu and Zhejiang), South China (Guangdong), North China (Beijing, Jilin and Liaoning) and Central China (Hubei and Chongqing).

Figure 33. Main automobile production bases in China. Source: Prepared by CEIBS-CEDARS.

Figure 34. Production in every region. Soure: CAAM databe (2016)

SAIC Shanghai

DFM Hubei

FAW Jilin

BAIC Beijing

GAC Guangdong

GREAT WALL Hebei

BYD Guangdong

GEELY Zhejiang

LIFAN Chongqing

SINOTRUK Shandong

CHERY Anhui

JAC Anhui

CHANA Sichuan

BRILLIANCE Liaoning

©"CEIBS,"Shanghai"2016""

ZOTYE Zhejiang

0""

1""

2""

3""

Beijing"

Tianjin"

Heb

ei"

Shanxi"

Inne

r"Mon

golia"

Liaoning"

Jilin"

Heilongjiang"

Shanghai"

Jiangsu"

Zhejiang"

Anh

ui"

Fujian"

Jiangxi"

Shando

ng"

Hen

an"

Hub

ei"

Hun

an"

Guangdo

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Guangxi"

Hainan"

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"Yunn

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Tibe

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Xinjiang"

Million&

2015"Output"(Units)"


47

Figure 35. Automotive industry regions in China. Source: “China – Automotive Sector” – NL Agency (Ministry of Foreign Affairs). August 26, 2011 and CAAM database 2016.

Hubei The automotive industry in Hubei is dominated by Dongfeng Motor Corporation (DFM) and its joint-ventures with OEMs Peugeot-Citroen Automobile, Honda and Nissan and with American automotive parts companies Cummins and Dana Corporation. DFM is a leader in heavy-duty vehicles and buses and has several brands in the sedan market. In Hubei Province, state-level development zones are established in Wuhan and Xiangyang with auto and auto parts as the main industry in the zone. In 2015 its total output of vehicles produced was almost two million. Changchun Changchun is the home town of First Automotive Works (FAW), China’s first state-owned automaker. FAW sold 2.9 million units in 2015. The company partners with Volkswagen, Toyota, General Motors and Mazda. Chongqing Chongqing is the home town of Chang’an (whose international brand is Changan). Chang’an Motors currently has 11 auto factories and two engine factories. It has established joint ventures with Suzuki and Ford-Mazda. In 2015 its total output of vehicles produced was almost 2.6 million. Due to its extensive natural gas resources, Chongqing is strong in R&D on CNG and LPG fuel engines. Guangdong Guangdong is one of the largest markets in the country. The sedan market is the most dominant in Guangdong. Currently, the auto industry in Guangzhou is well developed and largely shared by Honda, Toyota and Nissan. Auto part suppliers and the market have been growing very quickly around these companies. Local auto part manufacturers specialize in lower technical products; high value-added products are mainly being produced by Japanese, American and European suppliers. In 2015 2.4 million vehicles were produced in Guangdong. Shandong Shandong is strong in the production of commercial vehicles, heavy commercial vehicles and light trucks. Shandong currently has four major auto part production and export bases: the cities of Jinan, Qingdao, Yantai and Weifang. Tianjin The biggest name in Tianjin is FAW Tianjin, which consists of two different companies. One is a full subsidiary division of First Automobile Works (see information on Changchun) known as Tianjin FAW Xiali Automobile Co. Ltd. The other is a joint venture created in 2000 between Toyota and First Automobile Works known as Tianjin FAW Toyota Motor Co. Ltd. There are over 300 part and component suppliers in Tianjin, mainly from Japan, South Korea, China and the United States. Yangtze River Delta Region The region is home to several big players, such as Shanghai Automotive Industry Corporation (SAIC, which has joint ventures with Volkswagen and General Motors) in Shanghai, Geely in Hangzhou, Higer in Suzhou, Chery and Jianghuai in Anhui, as well as quite a number of second-tier auto part suppliers.


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2.6 The 15 Main Players: Ownership

2.6.1 State-Owned Companies In the Chinese auto market, around 80% of the auto companies are owned by the state. The target of the Chinese government is to protect its market from foreign brands while trying to boost national employment at the same time. State-owned enterprises (SOEs) appear to have some advantages, given the government’s financial support. Thus, as shown in the Historical Origins Map, almost every region in China had its own automobile manufacturing company supported by the local government. These companies were symbols of identity of each region. With such strong support from local and central governments, some of these companies became very important. Their governmental connections gave them advantages such as easier access to financial resources. SOEs are able to get support on land renting, tax etc. and also can benefit from national or regional policies, which can speed up the development at initial phase. But in a market oriented industry, SOEs have to develop their own core competences and deliver good products / services. However, government support can also be a drawback. Unconditional support from the government and the more beneficial conditions they receive from banks place these companies in a relatively risk-free environment, which does not encourage them to improve efficiency. Furthermore, the political background of senior management members is often more important than their professional knowledge and experience. Some specialists in the automotive industry think that the professionalism of state-owned management is unacceptably low, especially in strategic decisions. This is generally true for SOEs that have not had contact with foreign companies. As Mr. Ma from FAW-VW says the form of competitiveness still depends on the company itself. The figure below shows some of the strongest SOEs in China:

Figure 36. 15 Main Chinese Players. . Source: Prepared by CEIBS-CEDARS


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2.6.2 Private Companies Of the Chinese auto manufacturers, only around 20% are private. Special attention should be paid to the four that we believe are “competing in the same league” as SOEs. They are represented in Figure 44. Private companies do not receive as much support from the government as SOEs. However, despite this fact, some of them have developed successfully and can compete with SOEs. They have acquired some competitive advantages by investing heavily in R&D and new technologies. They have learned to focus on the Chinese market and are now in a favorable position. One of the main problems private companies have is political: sometimes the Chinese government wants more control over them. Another problem private companies face is financing, since they need private capital to survive, which makes them a little less stable than government-backed SOEs. However, their general economic health is good and sales in 2016 are currently strong. 25 This scenario is not expected to change in the near future. Consequently, these companies will likely continue investing in new technologies, such as the electric vehicle, and will try to create a strong company image while they explore overseas markets more. BYD is an obvious example of a successful private company, as it has managed to become a prominent player among electric vehicle manufacturers. Another example is Geely. An expert notes that the company has changed its strategy. In the past, Geely focused on low prices, but it now wants to focus on added-value products while at the same time improving its brand image. After Geely’s purchase of Volvo in 2010, The two firms agreed to set up a joint technical center in the Swedish city of Gothenburg to develop common small-car platform and powertrain technologies. Geely also beefed up its expertise by hiring Volvo engineers and designers, including Peter Horbury, who co-designed the GC9 sedan.

Figure 37. Main private Chinese companies. Source: Prepared by CEIBS-CEDARS.

25 See figure 1.


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The table below compares the main points of SOEs and private companies:

Area of Analysis SOEs Private Companies

Business Goals Social employment. Return on investment. Return on investment.

Financial Resources

More favorable treatment from banks and for land facilities.

Less favorable treatment unless financial strength is good.

Management Structure Associated with politicians. Independent management.

Motivation for People

Weak: less alignment between company interests and employee interests.

Stronger: usually more alignment between company interests and employee interests.

Work Efficiency Bureaucratic. More efficient.

Figure 38. Main points of comparison between SOEs and private companies. Source: Prepared by CEDARS.


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3. Current Market Situation

3.1 Domestic Sales The figure below shows 2015 brand rankings in terms of domestic sales (it should be noted that this graph only shows sales of Chinese companies for the local market, without exports).

Figure 39. Percentage based on domestic unit sales of Chinese companies in 2015 (units). Source: Prepared by CEIBS-CEDARS based on the CAAM database.

Domestic auto sales in China were around 25 million units in 2015. Twelve million were sold by wholly Chinese brands (not including JVs), which represents 50% of the total. The top three companies in terms of sales were SAIC, CCAG and DFM, which are all state-owned. Great Wall, the leading private company in the rankings, can be found in fifth position, with sales of around eighty hundred thousands units in 2015, a smaller than the top three in the rankings, but not bad when compared to other state-owned brands such as JAC and Brilliance. Also of note is FAW, the company in the tenth position in the rankings. It seems surprising that a major group like FAW (as mentioned above) should be ranked tenth, but in this case the sales numbers are only for these groups’ wholly Chinese production segment without their JVs. If the JVs were taken into account, SAIC Motor, Dongfeng and FAW would be first in the rankings, as mentioned above (See figure 30).

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Figure 40. Top 10 domestic-selling Chinese brands in 2015 (units). Source: Prepared by CEIBS-CEDARS based on the CAAM database.

As a general rule, the market is highly dispersed with a small percentage of sales for most of the players. With the consolidation of the Chinese auto market, this would change and there would be fewer automobile companies with higher market shares. Consolidation is not strongly pushed by the national government recently, while elimination of backward production capacity is a prioritized strategic movement. It's more likely that consolidation will be market oriented. From a national point of view, automotive industry can benefit from consolidation. Efficiency and synergy will be largely enhanced. On the other hand, from the regional or OEM perspective, they would prefer maintaining current situation so as to keep their own business. As Mr. Ma from FAW-VW explains local governments are helping those auto companies avoid lots of taxes. In the case of the consolidation, then these companies would not get any help from local authorities since they would be no longer be their duty. 26 The next chapter will discuss the Chinese brands in detail and provide a description of their development and the problems they face.

26 Roland Berger interview to Mr. Ma from FAW-VW. May 2016.

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3.2 Exports In recent years, the growth of domestic sales has slowed down. The deceleration of sales growth has forced Chinese players to consider investing in international auto markets. Chinese-made vehicles being shipped abroad are not yet a threat to the developed markets in the United States and Europe, where “Made in China” automobiles face stiff consumer scrutiny. Although brands like BYD are already in the market. The 12 meters BYD ebus has already been tested worldwide in major global cities, including in Europe: Paris, Bremen, Bonn, Madrid, Barcelona, Salzburg, Warsaw, Amsterdam, Brussels and Budapest. [3] What is clear is that low-cost automobiles are making inroads in fast-growing emerging markets such as Africa, Asia and Latin America. [4] Lawrence Ang, the executive director of Geely Automobile Holdings Ltd, said “It isn’t enough to just sell vehicles in China. The demand for low- to mid-end automobiles in overseas markets is much bigger than in China.” [5] Besides, expanding into overseas markets will help reduce overcapacity. The graph below shows the 2015 brand rankings in terms of exports.

Figure 41. Chinese exported brands in 2015 (units). Source: Prepared by CEIBS-CEDARS.

As shown in the graph, Chery exported the most vehicles in 2015. SAIC Motor, BAIC, Foton, DFM and JAC were also well ranked. Chery’s leadership is thanks to its established overseas manufacturing and sales networks. By region, Chery is focused on South America and the Middle East, which accounted for 54% and 40% of Chery total exports in 2015. By country, Iran and Venezuela accounted for 38% and 34% of Chery total exports in 2015 (thanks to localized production). “We have established 14 KD manufacturing bases and 3 R & D institutes, with our sales network covering over 80 countries and regions. With over 1,100 distribution outlets and over 900 service stations worldwide, we have achieved cumulative sales of over 1 million units.” [6] Geely also plans to sell one million autos overseas annually. After buying Volvo both companies have done very well recently. As for China's Geely, its push into international markets has been bumpy, not helped by the fact that it has focused on the slumping Russian market and other volatile emerging regions. After a booming year in 2013, exports have slipped back sharply, offset by good growth in Geely's home market. Nevertheless, the carmaker still has international ambitions and is upgrading its vehicles to rich-country standards. In mid-2015 its Emgrand X7 SUV gained five stars in the European NCAP safety

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tests. The CMA (Compact Modular arquitecture) rollout should help with further improvements. [7]

Figure 42. Top 10 Chinese exported brands in 2015 (units). Source: Prepared by CEIBS-CEDARS.

Some Chinese brands are already exporting automobiles to developed countries, such as Great Wall, which is exporting to Australia. Heightened South American competition prompted GM to work with a Chinese partner, Shanghai Automotive Industry Corp., to export Chinese-made SAIC models to South America.

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3.3 Passenger Vehicle Imports As mentioned in the previous chapter, imports have increased in China since China entered the WTO in 2001 until 2014. Thus, according to the CAAM, total vehicle imports for China in 2015 were 1,100,000 units. In 2015 imports decreased 23% due to economic slowdown and production localization. There are six foreign brands that are most often imported into China and that stand out from the others: BMW, Mercedes Benz, Lexus, Land Rover, Jeep and Toyota, which held 55% of the total amount in 2015. Some models of these brands are considered the top of the range, which is probably why they are popular imports. Imported autos have a better brand image than wholly Chinese brands and this is an important way for wealthy people and the young to show status. It is important to point out the lack of any North American brands among the higher-ranked vehicles. This is partly due to the new duties (starting in December 2011) imposed on autos imported from the United States. This means that companies like GM are forced to face an additional 22% on some SUVs and autos with an engine capacity of 2.5L and over. However, BMW, which exports autos from its American manufacturing plants to China, has only faced a 2% increase. Imported American autos are therefore very expensive for Chinese buyers now and this may lead them to buy imported vehicles from other countries. The following graph shows the top 15 imported brands in China in 2015.

Figure 43. Top 15 imported brands in China (units). Source: Prepared by CEIBS-CEDARS based on the Chinese Ministry of Public Security27.

Many consumers still consider imported cars have better quality than made-in-China cars. In fact, Lexus has delayed its localization plan exactly for that reason. [8]

27 Data refer to passenger vehicles excluding cross passenger vehicles according to the CAAM classification, which includes basic car, MPV, cross passenger and SUV in the passenger vehicle category. Some differences may arise, since motor companies do not always sell directly to distributors.

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Figure 44. Top 10 imported brands in China (units). Source: Prepared by CEIBS-CEDARS based on the Chinese Ministry of Public Security.

We have also examined imports from the perspective of provincial import volume. As shown in the graph below, in 2015, Guangdong Province, Jiangsu Province and Zhejiang Province imported more than 100,000 respectively and were consequently ranked in first and second places, followed by Beijing. This can be attributed to their higher population bases and booming economies in these provinces.

Figure 45. Imports in China by province in 2015 (units). Source: Prepared by CEIBS-CEDARS based on the Chinese Ministry of Public Security database.

Foreign brands have a better brand image over local ones. During the early stage, local vehicles had lots of issues with the quality as well as the design. Local OEMs still have a long way to go to build their brand images. Most Chinese brands are very new and lack the experience of the known global brands. They are seen by consumers as low-end vehicles, and can hardly turn to be a high-end brand by using existing brands.

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3.4 Listed Companies (Sales and Profits) In this chapter, we will analyze the sales and profits of listed Chinese auto companies, as well as their corresponding growth in 2015. In the graph below, sales (in billion RMB) are represented on the x-axis, Growth (%) is represented on the y-axis and profits (in billion RMB) are represented by the size of the bubble. As shown, one company, SAIC, is in an excellent position in the middle right with a big blue bubble. SAIC has combined sales (661 billion RMB), growth (a total growth of 17% from 2013 to the end of 2015) and profits (29 billion RMB) to become one of the main auto companies in China with a good forecast in coming years.

Figure 46. Sales, profit and growth of 2015 of some listed companies. Source: Prepared by CEIBS-CEDARS.

Although other Chinese manufacturers are not at the same level as SAIC, they must also be analyzed to identify the secondary group. We have therefore expanded the left side of the above figure to focus on the other companies (see figure below). As shown, Great Wall had a very aggressive sales record and growth rate and has a big bubble. DFM (Dong Feng Motor) also wanted to move its strategic focus to Chinese brands, which might meet with short-term resistance from the public due to the bad reputation of Chinese brands. On the other hand, most of the companies showed positive sales growth. There were thus companies with sales of around 80 billion RMB, such as BYD. It is important to point out that bigger sales do not always mean bigger profits, as demonstrated in the figure. Bubbles on the left side are sometimes bigger than those on the right. For example, Geelyy had sales of around 30 billion RMB, a lower amount than JAC, which had sales of around 46 billion RMB, but Geely had 2.2 billion RMB in profits, whereas JAC had only 0.9 billion RMB in profits.

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Figure 47. Sales, profit and growth from 2011 to 2013 of some listed companies, not including SAIC. Source: Prepared by CEIBS-CEDARS

Figure 48. Sales, profit and growth in 2015 ordered by ROS of some the most important Chinese brands.2829

SAIC leads the sales market but it is not as profitable as other brands such as Changan, Brilliance or GAC. Some companies have achieved impressive growth in the last two years. Changan achieved an impressive 74% and GAC a 56%.

28 Brilliance China Automotive Holdings Limited (HK:01114) mainly produces Jinbei-branded light buses and runs a 50:50 car JV with BMW. The company’s sales revenue only measures Jinbei light buses (excluding BMW JV), but the net profit measures both Jinbei brand and the huge investment income from its BMW JV, so the ROS is artificially high. 29 Hualing Xingma Automobile Group Co Ltd (SH: 600375) mainly produces medium and heavy duty trucks and special purpose vehicles. The company sold 16,653 units in year 2015, plunging 29% from a year ago, due to China’s weak infrastructure demand.

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Group Sales Profit ROS 20155Growth5RateBrilliance 4.862.860.000,00¥111111 3.280.270.000,00¥1111 67% 512%Changan 66.771.580.000,00¥1111 9.952.710.000,00¥1111 15% 26%GAIC 29.418.220.000,00¥1111 4.232.350.000,00¥1111 14% 31%Yutong 31.210.870.000,00¥1111 3.535.220.000,00¥1111 11% 21%Great1Wall 75.954.590.000,00¥1111 8.059.330.000,00¥1111 11% 21%JMC 24.527.890.000,00¥1111 2.222.060.000,00¥1111 9% 54%Qingling 5.504.300.000,00¥111111 485.140.000,00¥1111111 9% 55%Geely 30.138.260.000,00¥1111 2.288.660.000,00¥1111 8% 39%Zhongtong 7.113.980.000,00¥111111 399.270.000,00¥1111111 6% 97%SAIC 661.373.930.000,00¥1 29.793.790.000,00¥1 5% 6%BYD 80.008.970.000,00¥1111 2.823.440.000,00¥1111 4% 37%Lifan 12.458.000.000,00¥1111 393.770.000,00¥1111111 3% 9%Shuguang 4.431.850.000,00¥111111 103.410.000,00¥1111111 2% 9%Dongfeng 16.875.190.000,00¥1111 344.380.000,00¥1111111 2% 53%Kinglong 26.834.900.000,00¥1111 535.200.000,00¥1111111 2% 25%JAC 46.385.910.000,00¥1111 857.580.000,00¥1111111 2% 36%Sinotruck 19.363.660.000,00¥1111 278.520.000,00¥1111111 1% 519%Haima 12.180.960.000,00¥1111 162.460.000,00¥1111111 1% 51%Foton 33.997.490.000,00¥1111 406.410.000,00¥1111111 1% 1%Yaxing 2.015.440.000,00¥111111 20.200.000,00¥111111111 1% 37%Jinbei 4.638.120.000,00¥111111 35.750.000,00¥111111111 1% 510%Xiali 3.404.270.000,00¥111111 18.050.000,00¥111111111 1% 5%FAW 26.663.840.000,00¥1111 52.950.000,00¥111111111 0% 521%Xingma 3.542.660.000,00¥111111 5943.000.000,001¥111111 527% 529%


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4. Main Professional Predictions for Chinese Companies There are several opinions about the Chinese auto market and the Chinese companies that compete there. The market trend is that the growth rate will gradually slow down. Three other factors also have a significant influence in the industry which are urban congestion, energy saving and emission reduction and license limitation due to urbanization. As for the market dynamics, the automotive industry will be consolidated, and many OEMs with small scale will withdraw from the market due to loss of profits and government driven. As Mr. Ma from FAW-VW says consolidation of Chinese OEMs can generate synergy in the industry and increase the efficiency of resources usage. Consolidation can decrease redundant investment on plants, R&D, and channels. As an example, Mr. Ma uses the Korean government that only supports a few OEMs, leveraging most resources in the country. Korean OEMs have leading position in the worldwide market regarding scales and technologies. In any case, after consolidation takes place Chinese OEMs will be able to catch up with the development of foreign OEMs but still will not surpass them. The reason is that core competency of OEMs depends on both investment and long-term experiences. The market is changing fast, and the new market is where traditional OEMs, the Internet, and private corporate co-exist. Autonomous driving and car sharing as leading innovations will mostly change current business models and market competition. Under the national strategy of Internet+, the intelligent vehicle has become a hot topic being autonomous driving one of the areas. There are lots of pioneering researches and experiments conducted by both OEM and TMT providers. For instance, SAIC and Alibaba set up a fund for Internet vehicle, aiming at building an open research and operations platform. Mr. Shoulong Xu from Jaguar Land Rover explains that the US-defined autonomous driving is divided into six levels; currently, luxury cars could reach level 3, which can park the vehicle without the help of the driver. It is predicted that the level 6 will be achieved in 2030 and levels 4 and 5 are under testing. For Mr. Shoulong Xu the biggest challenges that autonomous driving faces are data safety and legislation. These should determine whether autonomous driving will be permitted on the road and when it will be authorized. Regarding car sharing, only a few companies launched a business in several regions in China, such as Car2share, China Car Club, and Eduoauto. They have a station-based business model. Vehicles are located at stations covering a particular catchment area and are returned to pick-up location or sub-area. Standardized fees and usage times are calculated in one-hour intervals and/or km driven. Moving to the Electric Vehicle Chinese experts see the development of NEV core parts as an opportunity for Chinese companies to obtain core technologies and surpass international parts companies. NEV powertrains is a relatively new technology. International OEMs and parts companies are reluctant to heavily invest NEV technologies due to previous huge investment on ICE and uncertainty of NEV market. Therefore, local suppliers have the opportunity to become technical leaders and market leaders. Moreover, the Chinese NEV market is mainly led by local OEMs, which benefits local parts vendors who have advantages to cooperate with local OEMs. The core competitiveness of NEV is battery according to Mr. Jun Zhang from Sungoal Exhibition. At the current stage, NEV sales are mainly driven by plate restriction and


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purchasing subsidies. But rare earths may help the competitiveness of China’s NEV motors. For the automotive industry, rare earth is majorly applied on NEV motors for its strong magnetism. With technology updates, purity and the magnetic force of refined rare earth are increasing, while the cost is decreasing. This will enhance NEV motor’s effectiveness and strengthen NEV’S competitiveness against ICE vehicle. Having large rare earth reserves, China can make an impact on supply and pricing of NEV motors. Regarding the future of the industry Mr. Zhu Fushou, the general manager of Dongfeng Motor, the slowdown of growth in sales or “micro growth era” will be harmful to Chinese companies and they will lose up to 10% market share in comparison with foreign automakers. He also forecasted that the products of foreign companies operating with Chinese brands through JVs would become cheaper, a fact that will not help Chinese companies because, he says, “The strong will get stronger and the weak, weaker.” But not all opinions are so dramatic. In fact, some experts agree that, even though the growth of sales is not as high as in previous years, this is normal behavior in a maturing market. The general opinion in the global auto industry is therefore that “China is still hot,” but that annual market growth will stabilize around 5% to 10% in the next few years instead of demonstrating the double-digit growth seen in the past. According to the editor, moderate but steady growth is not a bad thing, though. As Fiat Chrysler CEO Sergio Marchionne said, “There was too much growth too quickly.” Mao Hai of Beijing Auto (BAIC) has asserted, “China was on the verge of the third industrial revolution. We are moving from volume to innovation.” He believes that the Chinese auto industry should become more outward looking and international, and should invest more in R&D and factories abroad to develop the “Made in China” image. To conclude this section, mention should be made of the quality of Chinese autos. They do not have a good brand image abroad or even in China, where local people still trust foreign brands more than Chinese ones. Domestic brands need to put more effort into R&D to design better technologies that can make them more independent and improve safety and quality. Although Chinese brand quality is much better than before, there is still a long way to go to achieve the standards needed to export abroad. The future of Chinese companies is closely associated with the level of protectionism of the Chinese government. This industry is crucial for China’s economy, and the government owns around 80% of Chinese manufacturers. One example of a recent protectionist measure was the government order that state agencies could only buy state-owned brands. Moreover, In February 2016, the State Council required that NEVs should account for at least 50% of all new vehicles purchased every year by central government departments and some key cities’ publicly funded institutions. The future seems to be quite open, which means the development of Chinese companies should be checked in the next few years to make a valid prognosis of the future.


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III. ANALYSIS OF CHINESE BRANDS Before beginning this section, it is necessary to clarify the definition of the term “Chinese Brands.” In this section, “Chinese automotive brands” are the vehicles that are fully controlled by Chinese OEMs regarding intellectual property. They include the vehicle brands that fully belong to Chinese OEMs and also what are known as joint venture Chinese brands, the automobile brands created by joint ventures to produce and sell exclusively in China for the Chinese market. According to Deloitte’s Automotive Industry Report, Chinese companies are speeding up their pace to go abroad. Acquiring high-quality resources and absorbing advanced operation insights and management methodology have become a major pathway for Chinese automotive companies to grow bigger and stronger. Under the environment of a slowed-down economy, weak consumer demand for new cars, and lack of organic growth momentum, outbound M&A will be the main driver for Chinese companies' inorganic growth. It is well acknowledged that the Chinese automotive market entered a booming era in 2001 with steady growth in automotive production and sales on a yearly basis. Chinese automotive brands have also achieved great performance in some targeted market segments. Their growth in sales would seem logical, given that this policy-driven nation regards the automotive industry as one of its pillar industries and its government provides Chinese brands with dozens of incentive policies.30 At the same time, benign market conditions for Chinese brands are also largely enhanced by patriotism and a preference for national products over foreign brands. Meanwhile, the growing market for Chinese brands also provides a great environment for SOEs and private automotive companies. Their development, especially that of private automakers, has been seen as a great sign for the Chinese automotive market. Some experts expect private companies to play a more significant role in the Chinese market in the future, and for state-owned companies to receive fiercer competition from private companies in different market segments. However, most Chinese brands are not optimistic about the current situation and believe that the challenges they face are greater than their opportunities. The decline in market share in recent years compared to foreign brands in some segments such as basic passenger vehicles confirms their need for concern. Ongoing struggles to seize market share have placed Chinese brands on a frontier battlefield. Their immaturity and insufficient technology, together with their poor brand reputations, have profoundly limited the survival space of Chinese brands. Moreover, most Chinese brands have swarmed to the low-class vehicle market, where there is low profitability and where they are rarely capable of reinvesting in R&D. It could be fatal for them when foreign brands with advanced technology and better brand reputations start invading this market segment because Chinese brands’ fragile position will be seriously eroded. This chapter will discuss the performance of Chinese brands in recent years, analyze their strengths and weaknesses, and discuss the opportunities and threats Chinese brands face.

30 The automotive industry is considered one of the pillar industries by the Chinese government.


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1. Top Ten Chinese Brands China’s entry into the WTO in 2001 promoted the development of Chinese brands. The thought of building more Chinese national brands emerged and was developed and finally executed. In the period from 2006 to 2015, which is known as the boom in the Chinese automotive industry, the sales volume of Chinese brands highly correlated to total sales of passenger cars, with similar growth from year to year. The graph below compares sales of Chinese brands with total Chinese market sales only in terms of passenger cars (not including crossovers). For the truck and bus markets, Chinese brands held dominant positions.

Figure 49. Sales of Chinese brand cars and total passenger cars. Source: Prepared by CEIBS-CEDARS.

As it can be observed in the graphic Chinese brands in the market of passengers care have been losing car sales’ percentage in the past years. This trend changed in 2015 due to a strong raise in the Chinese brand sales. The most striking brand to the Chinese mind of all the Chinese brands in the Chinese automotive industry is Hongqi, the first Chinese passenger car brand in history. After more than 20 years, Hongqi is still alive, but is no longer the symbol of Chinese brands. The reasons behind this are diverse, but one of the most convincing reasons is the fact that dozens of Chinese brands subsequently emerged and quickly captured market share. State-owned companies created and developed their Chinese brands through their considerable strengths and government incentives, while private companies also joined market competition through industrial consolidation and strategic market segmentation. The graphs below show the top ten Chinese brands from 2012 to 2015 and their respective market share in the whole Chinese automotive market.

Figure 50. Top 10 Chinese brands in 2012. Source: Prepared by CEIBS-CEDARS.

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The sales unit includes domestic sales and exports. As seen in the graph, the top three from 2012 to 2015 were extremely steady. Wuling (also known as SGMW), Dongfeng and Changan jointly accounted for about 18% of market share every year. Wuling focused on the minivan market segment and impressively accounted for 8% of market share with growth in absolute volume on a yearly basis. Its impressive performance was followed by Dongfeng and Changan, whose lineups penetrated across different vehicle segments. The fourth to tenth places changed continuously from year to year. One distinctive feature is that private automotive companies actively sought out opportunities to improve their business and began to challenge state-owned companies’ dominant positions. For example, Great Wall achieved sale units of more than 850,000 in 2015 and was ranked in fourth place for the first time. Its SUV series (especially for Haval) earned a great reputation on the domestic and global markets. An expert, commented on the recent success of Great Wall. He said that Great Wall focuses on its core competency in the SUV segment, which is growing at an uneven rate. Great Wall also exports its cars, so it is

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familiar with global standards and applies those technology and quality standards to its own vehicle production. Mr. Wei Jia Jun Chairman of the company said that with an operating principle of “Focus on Quality, Reform Research and Development, Strengthen Operation” and a steadfast philosophy of quality operation, the Group continued to focus on product quality enhancement. BYD, a pioneer in electric vehicles, occupied the tenth place in 2015. Moreover, a recent enquiry found out that BYD is the most popular domestic brand with a 5% of respondents saying that it was their favourite brand. VW took the first place with a 20% of respondents. [9]Some experts expect private companies to play a more significant role in the Chinese market in the future, and for state-owned companies to receive fiercer competition from private companies in different market segments.


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2. Chinese Brands vs. Global Brands The increase in sales of all the Chinese brands has not allowed the managers of Chinese brand manufacturers to breathe easy. This section will demonstrate the reasons behind this and provide a detailed description of the market situation by comparing Chinese and global brands.

2.1 Total Market Share If we take a closer look at market share for Chinese brands, it is clear that their total market share shrank from 60% in 2010 to 48% in 2015. The situation was even worse for the passenger vehicle market, where Chinese brands could only take 42% of market share in 2015, whereas they were able to account for half the market in 2010. The steady drop in relative sales reflects the huge challenges from foreign brands, which expanded their lead in total market share in the passenger vehicle market. Foreign brands showed high performance levels in certain market segments. Because most Chinese brands of passenger cars concentrate on the low-class market segment, the decreasing market share for Chinese brands could imply that the foreign brands' invasion into this segment is proceeding. (See a further analysis in Chapter 2.2). An expert says that some Chinese brands enter all the vehicle segments, but do not have clear model policies. They disperse their resources without focusing on advantageous market segments. Joe Spahl, the Market Director of Fiat Chrysler, argues that Chinese brands always focus on vehicle price rather than quality, safety and brand image. But the approach of foreign brands when joining market competition is to do the opposite. They focus more on R&D, innovation, quality and safety, thus creating better brand images in consumers’ minds.

Figure 54. Market share for Chinese brands in the passenger and commercial vehicle segments. Source: Prepared by CEIBS-CEDARS.

The commercial vehicle segment is an area that has not been under attack by foreign brands and where Chinese brands accounted for more than 90% of market share each year. Leading Chinese companies such as Sino-Truck took huge market share and barely faced challenges from global brands. As for M&A, Deloitte’s China Automotive Industry says that the speed of overseas green field investment by China automotive companies has slowdown due to political turnmoil. Outbound M&A activities continue to heat up and M&A deal amount reached a record in

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2015. Outbound M&A is expected to be the primary form for Chinese enterprises FDI31 32. Auto suppliers are the main buyers of overseas targets as they want to leverage the acquisitions to advance to high level value chain, accounting for 80% of the total M&A deals during 2013-2015. Private enterprises are more active than previous years, accounting for half of the total M&A deals.

2.2 The Passenger Vehicle Market Four segments will be discussed in this section: basic cars, SUVs, MPVs and crossovers (mainly minivans). In terms of the SUV segment, the graph below shows how Chinese brands performed from 2010 to 2015. SUVs have become increasingly popular, especially among young people, which could explain the increase in total sales volume year after year. Chinese brands also enjoyed a booming market and achieved a general upward trend in sales volume. Their market share stayed around 40% without major fluctuations. Then it soared and it has reached 55% in 2015. The most sold brand in the SUV market is Great Wall. The SUV boom has helped to rescue domestic Chinese automakers that had steadily lost market share to bigger, richer foreign brands. [10]

Figure 55. SUV sales and market share of Chinese brands in China. Source: Prepared by CEIBS-CEDARS.

In 2013, due to a statistical adjustment that reclassified some hot-selling minivan models like Wuling Hongghuan and Changan Honor the MPV market experienced a significant increase. Regardless of this fact an important growth can be seen in this market segment. Sales in 2015 reached 1.8 million units. The amazing growth of the MPV market has attracted the attention of many carmakers, including those that make premium vehicles. The MPV segment is dominated by local automakers' low-end vehicles that command about 90 percent market share. Some are already wondering if the situation is ripe for change. [11] For instance, Volkswagen Import's new Sharan entered the Chinese market recently. As Axel Shroeder holds "As one of the largest vehicles in the segment, the new Sharan is nice for family use, and suitable for business. Our unique technologies give higher fuel efficiency to our cars. The power comes early in our cars." [12]

31 FDI stands for foreign direct investment. 32 Chinese companies tend to acquire the middle size foreign enterprises that are highly specialized and have a large share in a specific market segment.

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Figure 56. MPV sales and market share of Chinese brands in China. Source: Prepared by CEIBS-CEDARS.

Regardless of improved performance in the SUV and MPV segments, Chinese brands still earned low market share in the basic car segment and suffered continuous decreases from 2010 to 2015. This was achieved not only through their advanced vehicle technology applied to premium and middle-class vehicles, but also through their ambitious entry into low-class vehicle markets, where the concentrated Chinese brands were unable to keep their market share against the global reputations of foreign brands.

Figure 57. Basic car sales and market share of Chinese brands in China. Source: Prepared by CEIBS-CEDARS.

The last segment is crossovers. In our analysis, crossovers only include minivans (mini trucks and pickups are excluded). Market share is dominated by Chinese companies, which did not encounter any challengeable global brands. As mentioned in the previous section, Wuling (SGMW) is the biggest minivan producer and has stayed in the top position for many years, and "its dominant position will be stable for years,” according to Hans-Joerg Ehlers, the Vice President Commercial Operations & Business Planning Asia at Lear Corporation.

2.3 The Commercial Vehicle Market The bus and truck segments are included in the commercial vehicle market and the Chinese brands in these two segments maintained very high and stable market share.

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For the truck segment, Chinese brands steadily took 97% of market share. It seemed as if there were no foreign brands. However, there is considerable cooperation between Chinese companies and foreign companies, such as Sinotruk and MAN SE and Steyr, Foton and Daimler, and SIH (SAIC-IVECO HONGYAN Commercial Vehicle Co., Ltd.) and Fiat., On one hand, Chinese companies have introduced and absorbed advanced technology, then adjusted these technologies and also innovated new technologies to meet the Chinese market’s requirements; on the other hand, Chinese brands have worked with foreign companies to develop joint brands of trucks, engines and other core parts. As seen in the bus segment, market share for Chinese brands remained around 80% with less fluctuation. Unlike the light vehicle market, the Chinese bus segment is dominated by Chinese brands such as Yutong and Kinglong. Their contribution to the bus market lies not only in the high market share they take every year, but also their high quality, which meets global standards worldwide.

Figure 58. Market share for trucks and buses of Chinese brands in China. Source: Prepared by CEIBS-CEDARS.

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3. Exports The graph shows total export volume in recent years. Export volume includes all vehicle types. The graph shows that the steady rise from 2010 to 2012 brought new hope for Chinese brands. However, due to the slowdown in global demand for vehicles, geopolitical inestability in Iraq and Ukraine, higher import tariffs in Algeria and Brazil and the appreciation of the Chinese currency (RMB) and a soft yen and won, Chinese brands suffered a clear decrease in the last three years.

Figure 59. Exports of Chinese brand vehicles. Source: Prepared by CEIBS-CEDARS.

Chinese brands have natural advantages when they choose to export their vehicles worldwide. One core competitiveness comes from low labor costs in China, which reduces the selling price in foreign countries. At the same time, government policies also encourage Chinese brands to enter the world stage to release domestic production capacity and, more importantly, to generate a global reputation for Chinese brands. However, unlike foreign vehicles imported to China, Chinese brands still have a “low-class” image in foreign consumers’ minds. The negative impression of Chinese exported brands is also enhanced by low technology and poor aftermarket service in some countries. Moreover, most Chinese brands were not able to access developed countries with high-quality requirements and emission standards for entry. This section will discuss how these advantages and some disadvantages have impacted exports of Chinese brands. Charles Knight, global managing director of Deloitte M&A Transaction Services says that ‘"Chinese carmakers are not so focused on international vehicle trade as a way to expand and strengthen their global presence because of import tariffs, non-tariff barriers, and the drastic currency fluctuation of host countries." Chinese carmakers are rapidly building more overseas manufacturing plants, with countries in Latin America, ASEAN and Eastern Europe emerging as their preferred destinations, according to Deloitte's China Automotive Industry Outbound Investment Report. For instance, State-owned enterprise BAIC is to produce vehicles in Mexico in 2017 to further expand and strengthen its global presence, amid the trend for Chinese carmakers to produce vehicles abroad due to the effect of fluctuating international currency rates on sales, among other factors [13].

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3.1 Exports by Type In this section, the classification of vehicles is slightly different from the way they were classified in the previous section. The data used here were retrieved from the China Custom database, whose passenger car category includes basic cars and MPVs, while its commercial vehicle category includes pickups, mini trucks and crossovers. The graph below shows that, in terms of export volume, the SUV and bus segments increased from 2010 to 2014 and then experienced a drop in 2015. The passenger car segment was highly correlated with total export volume. The truck segment gravitated around 200,000 units and the commercial segment also remained stable after a sudden increase in 2011.

Figure 60. Exports units of Chinese brands in different vehicle segments. Prepared by CEIBS-CEDARS.

In terms of export value, because of the appreciation of the Chinese currency and growing domestic labor costs, vehicle prices had to be pushed up to guarantee profitability. However, higher prices reduced the core competitiveness of Chinese brands, which, in return, negatively impacted export volumes.

Figure 61. Export value of Chinese brands in different vehicle segments. Prepared by CEIBS-CEDARS.

Chinese OEMs setting up overseas factories in developing countries could also be a reason for the decline in exports from China. Fernando Brekes, Supply Chain Manager of Corven SAFIF, points out that both Lifan and Chery have plants in Uruguay to supply South American markets.

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3.2 Top Ten Brands The top ten Chinese brands in 2014 and 2015 in terms of export value are listed below. The OEMs that focused on light vehicles, such as FAW and Lifan, to experienced a sharp decrease in their export value, but heavy vehicle OEMs such as Sinotruk and Foton increased their export value steadily.

Figure 62. Top 10 Chinese brands in terms of export value in 2014. Source: Prepared by CEIBS-CEDARS.

Figure 63. Top 10 Chinese brands in terms of export value in 2015. Source: Prepared by CEIBS-CEDARS.

3.3 Top Five Brands by Segment The top five brands by segment will be evaluated in terms of export volume. Some Chinese brands that were not among the top ten on the exporting list made an appearance in certain segments of the list, such as Greatwall in the SUV segment, Changan in the commercial segment and Golde Dragon in the bus segment.

Figure 64. Top 5 Chinese brands by segment in 2015. Source: Prepared by CEIBS-CEDARS.

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4. Analysis of Typical Chinese Brands This section will describe three typical Chinese brands in three different market segments: BYD in the light vehicle market, Sinotruk in the truck market, and Yutong in the bus market. For each typical brand, performance analysis, SWOT analysis and future analysis will be applied to demonstrate how their market strategy aligned with company development and what impact it had on the Chinese automotive market.

4.1 Geely in the Light Vehicle Market Established in Zhejiang Province in 1987, Geely has become one of the most sucessful Chinese vehicle brands in light vehicle market. In 2015, Geely achieved a sales volume of 538,548 vehicles, which showed a 26% increase for the year. The market share for Geely was 3.85% in light vehicle market. On the export side, Geely exported about 28 thousand units to foreign countries in 2015. As a private automotive company, Geely’s development in recent years has attracted great attention both domestically and globally. Before 2014, there were three sub-brands: Shanghai Englon, Emgrand, Gleagle, and all of them had their own marketing positions. Shanghai Englon is positioned at family car, delivering the brand concept of caring and trust. ; Emgrand focuses on business vehicle and family vehicle; Gleagle targets young consumers who are passionate and fashionable. However, the marketing strategy of these three brands seems to be ambiguous. At the same time, three brands bring bottlenecks in terms of product innovation and sales channel expansion. Therefore, in 2014, Geely announced that these three brands are integrated into one new brand, namely New Geely. Its product lineup is also re-organized into five series, and each series has its own model targeting at different segment from A00 to B.

Figure 65. Product lineup for BYD. Source: Prepared by CEIBS-CEDARS.

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Another significant development that is worth mentioning is that in 2010, Zhejiang Geely Holding Group 100% acquired world renowned automotive brand Volvo at the price of 1.8 billion dollars. The acquisiton is widely recognized as a significant step for Chinese brand entering world stage. For Geely, three reasons contribute to this acquisiton: 1. Brand image. Volvo is a famous automotive company which had developed for almost

100 years, containing enormous brand value. Through this acquisition, the brand image could soon be improved: not just focus in the low class vehicles, but also in premier ones. This will be extremely helpful when Geely intends enter the middle and premium markets.

2. Technology. Geely acquires 1,500 engine patents and 200 vehicle design patents as well as other significant patents through this acquisition. These technology patents will help Geely improve innovation capability, providing core competence in market competition.

3. Global market. It could be extremely hard for Chinese brand to go to the global market, but Geely never stopped to do that. Through Volvo acquisition, Geely quickly entered global automotive market and took market share, avoiding market barrier.

Strengths : 1. Large portion of revenue spent on R&D. Technology for key components, including engines and transmissions. 2. Extensive product range in passenger vehicle market. 3. Exports: Among top five local Chinese brands. 4. Private enterprise. 5. Successful merger with international brand Volvo and Australian DSI automatic transmission factory. 6. Successful brand strategy.

Weaknesses: 1. Low investment in EVs. 2. Not present on truck and bus markets. 3. Weak after-sales service networks. 4. Brand image and quality need to be further improved.

Opportunities: 1. Huge growth potential of Chinese market. 2. More international giants seeking partners in China. 3. More emerging markets, including India, Russia, Central Asia, the Middle East, Africa and Eastern Europe.

Threats: 1. Fierce competition from international brands as they accelerate their expansion in China. 2. Trade barriers in export markets. 3. Local brands (such as CIIMO) launched by joint ventures.

Figure 66. SWOT analysis for Geely. Source: Prepared by CEIBS-CEDARS.


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4.2 Sinotruk in the Truck Market As the pioneer in the Chinese heavy vehicle industry, China National Heavy Duty Truck Group Co., Ltd., Sinotruk for short, is now one of the biggest heavy vehicle production companies in the world. Its business areas include trucks, buses and engineering of machinery, among other activities. In this section, only Sinotruk’s truck segment will be discussed. From January to November in 2015, Sinotruk has reported the sales of 142 thousand units, among which 60% are heavy truck. It achieved the sales revenue of 54.4 billion RMB, taking up the marketing share of 17.86% in Chinese truck market. The current lineup for Sinotruk includes the Sitrak, HOWO, Steyr, Huanghe and other models in the truck, truck tractor and special truck categories. Sinotruk has also created brands such as the HOWO-A7 and HOWO-T5G to enter the premium market segment. Therefore, it has built the most comprehensive product series in Chinese truck industry. The table below shows the SWOT analysis for Sinotruk. Strengths : 1. Advanced technology through cooperation with global truck companies 2. Full range of product lineup from low-class to premium, covering all the segments in truck market 3. Powerful distribution channel network 4. Leading brand reputation 5. Low production cost through scale effect and vertical integration 6. Powerful production capability

Weaknesses: 1. Pressure from unique core part suppliers 2. Innovation insufficiency 3. After-sale service needs to be improved 4. Improper production model, causing huge inventory in the supply chain 5. Huge organizational structure and low work efficiency

Opportunities: 1. Increasing market demand because of steady growth of national economy 2. Improved technology for trucks 3. Improved buying ability from consumers

Threats: 1. Transformation of economic growth pattern from extensive economy to intensive economy 2. Improved truck production standards 3. Stringent requirements for emission standards 4. Entry of foreign brands

Figure 67. SWOT analysis for Sinotruk. Source: Prepared by CEIBS-CEDARS.

Strengths: Advanced technology: In 1983, Sinotruk successfully introduced the Austrian Steyr project and set a milestone for the first cooperation agreement with a foreign company. In 2009, Germany truck company MAN SE cooperated with Sinotruk to become a stockholder and strategic partner. The introduction of the HOWO-T5G in 2013 marked the entry of Chinese brands in the premium class of the truck industry. Powerful distribution channel network: Sinotruk has set up direct sale agencies in every Chinese province. It has also expanded its service network in most big and medium-sized cities in China. Currently, more than 1,000 service centers have been set up within China. At the same time, the after-sales network and parts sales agencies have also been established, the number of which also exceeds 1,000.


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Low production costs: Sinotruk has achieved a scale effect through high yearly production. At the same time, Sinotruk has its own assembly production centers that produce core parts for heavy vehicles. This not only cuts down on production costs, but also reduces cost pressure from external suppliers. Powerful production capability: Sinotruk has six companies for heavy vehicle production, two wholly owned companies for special vehicles, and four share-controlled companies for special vehicles. It also has a great number of assembly and parts companies located all over China. Weaknesses: Pressure from unique parts suppliers: Because of the unique features of the truck industry, especially in the premium segment, parts suppliers are limited. Therefore, some of the parts that cannot be produced by Sinotruk are under cost pressure from unique external suppliers. Low work efficiency: Due to the huge organizational structure of Sinotruk, it is hard for the company to achieve high efficiency in terms of internal communication across departments, which slows down the speed of work. Opportunities: Increasing market demand: In 2015, economic growth remained steady. Recovery in the areas of logistics, public transportation construction, restructuring of old cities and urbanization increased demand for heavy vehicles. Threats: Stringent requirements for emission standards: In 2014, some Chinese regions are scheduled to implement new emission standards that will place more stringent requirements on heavy vehicle emissions. New vehicles that do not meet the standards will not be able to enter the market. In terms of quality and technology standards, Sinotruk has set a target to reach the world-class level in the heavy truck series and the first-class level for the rest of its products in China. Another interesting strategy Sinotruk would like to apply is its multiple-brand strategy, through which, Sinotruk aims to reduce all its current brands to only four: HOWO, SITRAK, STEYR and HOHAN. Each brand will have its own logo to target different truck segments. To guarantee more valuable service to consumers, each brand will also set up new distribution networks to support vehicle sales and after-sales.


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4.3 Yutong in the Bus Market Zhengzhou Yutong Group Co., Ltd. was founded on January 8, 1997. It is a large-scale industrial group mainly specializing in the bus business and also covers some other strategic businesses such as construction machinery, automotive parts and components. In the Large sized bus market, Yutong was ranked the first in China’s bus industry in terms of sales performance in 2015, when it achieved sales of 26,973 units, increased at the rate of 8.5% on a yearly basis, and accounted for 31.91% of market share. In terms of the whole Yutong Group, its turnover amounted to 41.8 billion RMB, a increase of 12.1% compared to 2014. To date, Yutong has produced a complete 5m-25m (this makes reference to vehicle length) product lineup consisting of ordinary, medium-level and high-level products. It covers various segments, including highway passenger transit, tourism and public transport, and has become a leading brand in China’s bus industry.

Figure 68. Product lineup of Yutong. Source: Prepared by CEIBS-CEDARS.

Before we discuss the SWOT for Yutong, it is important to analyze the strategies the company has applied in recent years and those it plans to apply in the near future. 1. Green Bus Strategy. Yutong has a long history of green vehicle investment. Early in 1999, Yutong successfully produced the first pure electric bus. In 2009 and 2010, it continuously launched the first hybrid power system and pure electric drive system, which were researched and developed independently by Yutong. In 2011, Yutong invested 2.4 billion RMB to build a production base in Zhengzhou to produce energy-saving and new energy buses. It plans to enlarge Yutong’s production capacity by 10,000 units per year, including 6,000 energy-saving buses and 4,000 new energy buses. In 2015, Yutong achieved more than 20,000 units of green vehicles, increasing 179% compared to 2014 and ranking the first in green bus market. 2. Lowest Consuming Cost. By cooperating with industrial giants such as Michelin and Fiat Powertrain Technologies, Yutong has launched the LCC strategy to help buyers deal with cost pressure. LCC advocates that buyers should evaluate the cost not just in terms of purchasing, but also from the perspective of safety, fuel consumption and the aftermarket. Therefore, Yutong will cooperate with upstream suppliers to produce buses with the most economical life-long costs, and will help downstream buyers cut operating costs by finding the best operating solutions, such as operating route selection. 3. Globalization: Yutong buses have been exported to many countries and regions, including Cuba, Venezuela, Russia, Iran, Saudi Arabia, Hong Kong and Macao. Yutong has received WVTA certification from the European Union and has started to enter the


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European market. Yutong’s buses have been delivered to France, Norway, Israel and Macedonia, and Yutong successfully entered the American market in 2012. The table below lists the SWOT for Yutong. Strengths: 1. Brand reputation 2.Strategic cooperation with industrial giants 3. Wide range of product lineups 4. Cost effectiveness

Weaknesses: 1. Insufficient product standardization 2. Insufficient professional talent

Opportunities: 1. Increasing demand for buses 2.Incentive policies for new energy bus purchasing 3. Intense global cooperation

Threats: 1. Fiercer competition in bus market 2. Higher standards for buses (quality and emissions)

Figure 69. SWOT analysis for Yuton. Source: Prepared by CEIBS-CEDARS


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IV. ELECTRIC VEHICLES

The idea of cleaner green technology to propel road vehicles is now becoming more of a reality. It seems that the internal combustion engine (ICE) will continue to be the main technology used since it is the most developed and widespread technology. But the auto market is incorporating new, cleaner technologies on the way to achieving a green energy vehicle. Hybrid vehicles are already on the road, though they are still quite expensive. It is generally accepted that this is only the first step towards the electric vehicle (EV). Other green technologies are also worth mentioning, such as the fuel cell vehicle powered by hydrogen, which is still being developed and may be another choice for the future. Faster adoption of the EVs is seen as a promising way to reduce China’s growing dependence on imported oil, relieve pollution in urban areas, and help domestic OEMs and suppliers to gain a competitive edge over their stronger international rivals.

China almost fulfilled its 2012 plan to achieve cumulative production and sales of 500,000 NEVs by 2015. The 5-million-unit target was first set by the State Council under the Development Plan for Energy Saving and New Energy Vehicle Industry (2012-2020), and was recently reiterated under the 13th National Five-Year Plan (2016-2020). That means the Xi-Li administration is very serious about it. This amazing boom of the electric vehicle industry is due to the government commitment to make the industry grow, up to April 2015 the government had invested 37 Billion in the sector according to a McKinsey Report. The government not only offers subsidies but also, in first-tier cities such as Beijing a quota for NEV vehicles is settled, and it is unnecessary to go through the lottery system. As a result, many drivers are turning to electric cars. In the last two years, the yearly growth in sales and production of NEVs has been over 300%. BYD believes such incentives will become increasingly unnecessary as the sector becomes "driven more by the industry's fundamentals than government policies," it said in its 2015 annual report, which predicted "a phase of acceleration in full force." Moreover, current research is focusing on batteries and new technologies like aluminum-air batteries or graphene batteries may further help the development of the industry. Green vehicles include several vehicle types, such as hybrid electric vehicles, battery electric vehicles, fuel cell electric vehicles, hydrogen vehicles, and gas vehicles. However, in the current Chinese automotive market, the electric vehicle is the most representative type of green vehicle and receives huge attention from the government and the public. Therefore, in order to analyze this emerging market, EVs are the best place to begin. The purpose of this chapter is to demonstrate the current situation of electric vehicles in China by analyzing opportunities and challenges on the Chinese EV market. Different market factors will be discussed, including government initiatives, OEM activities, infrastructure construction, and future perspectives. Case studies on two EV models, the Tesla and the Denza, will also be discussed to provide a detailed overview of the current development of different EVs.


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1. Classification of Electric Vehicles Electric vehicles are vehicles that use one or more electric motors or traction motors for propulsion. They can basically be divided into hybrid electric vehicles (HEVs), plug-in hybrid electric vehicles (PHEVs), battery electric vehicles (BEVs) and fuel cell electric vehicles (FCEVs). New energy vehicles (NEVs) is the name most frequently used in China. This category currently consists of PHEVs, BEVs and FCEVs but not HEVs. A hybrid electric vehicle (HEV) has a combination of an internal combustion engine (ICE), a bank of batteries and an electric motor. For the ICE, a gasoline engine is commonly used on the Chinese automotive market and is assisted by an electric motor for output power. The HEV range includes micro hybrids, mild hybrids and full hybrids, depending on the power output of the electric motor. The micro hybrid’s electric motor only works to start and stop the ICE. It cancels idling periods for the ICE and reduces consumption and emissions by 20%. The power output of the mild hybrid’s electric motor can be used to boost acceleration, thus complementing the power insufficiency in the ICE’s overloading operation. It can reduce fuel consumption by 20% to 40%. Electric motors in full hybrids with a maximum voltage of 272V to 650V can provide output power to independently start the vehicle and maintain even-speed driving. The Prius model is this kind of EV. It provides a reduction in oil consumption of more than 40%. The table below shows the representative vehicle models of each type of hybrid.

Hybrid Type Functions of Electric Motor Vehicle Models

Micro hybrid Start-stop Chery A5 Hybrid, PSV C3 Hybrid

Mild hybrid Start-stop + acceleration Honda Insight Hybrid, Accord Hybrid

Full hybrid Start-stop + power for even-speed driving Toyota Prius Figure 70. The representative models of hybrid vehicles.

A plug-in hybrid electric vehicle (PHEV) is a hybrid electric vehicle with rechargeable batteries that can store a full charge by connecting a plug to an external electric power source. It also combines a conventional ICE and an electric motor, but the batteries in PHEVs are larger than those in normal HEVs. PHEV batteries can maintain independent driving in all traffic conditions. When fully charged, a PHEV can meet most daily travel requirements by functioning as a BEV. When the batteries run out, the vehicle can be powered by a gasoline or diesel engine, like a vehicle with an ICE. Therefore, it combines the advantages of HEVs and ICE vehicles. PHEVs can be divided into series PHEVs, parallel PHEVs and series-parallel PHEVs depending on the number of power systems. Series PHEVs have only one power system set, which consists of an electric motor, batteries and a controller. The electric motor directly controls the wheels and the ICE is used as a range extender by recharging the batteries, not as a propulsion unit. On the one hand, this enables PHEVs to drive without a transmission, thus cutting down on production costs, but on the other, it creates waste in the process of internal energy transfer from the ICE to the batteries. The parallel PHEV solves the problem by installing two sets of power systems that can control the PHEV independently or in coordination without the energy transfer process, thus reducing energy inefficiency. The electric motor can work together with the ICE to drive the vehicle or charge the batteries like an electric generator, depending on driving conditions. The series-parallel PHEV also has two sets of power systems, but improves on the parallel PHEV by having two electric motors.


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A battery electric vehicle (BEV) is an EV that uses chemical energy stored in a rechargeable lithium battery pack, an electric motor and a motor controller for propulsion instead of an ICE. A BEV mainly consists of a chassis, body, storage battery, electric motor and motor controller. It derives power exclusively from its battery packs. BEVs therefore have no internal combustion engine, fuel cell or fuel tank. The BEV itself generates almost zero emissions when driven, so it is seen as the future of NEV development. Leading brands such as Tesla and Denza have received great attention and are very popular. There are two charging models: One is OEMs equip unchangeable batteries in NEV and rely on charging piles to

charging batteries. The other is OEMs equip swappable batteries in NEVs. NEV will be sold at a price

excluding battery price. And OEMs will collect annual membership fee to cover consumers' battery charging cost and even maintenance cost.

In the long run, second business model will be more profitable and efficient for OEMs. OEMs will have higher sales revenue because consumers have better car-using

experiences and higher loyalty. OEMs can reach cost efficiency after original investment has been amortized. OEMs can collect used battery and re-use them in energy storage with low collection

cost. A fuel cell electric vehicle (FCEV) is an EV that uses a fuel cell to power the electric motor without the help or support of an ICE. The battery is needed to absorb energy spikes and store regenerated energy when braking. It improves on the conventional EV in terms of battery weight, battery capacity and charging duration, and also increases the driving range and reduces emissions (the only emission is water). However, there are two drawbacks that prevent it from becoming widely popular: the price of the batteries and the immaturity of hydrogen technology. Therefore, though FCEVs have been tested in laboratories for a long time, they have not been launched by practically any automotive OEMs. The main differences between these types of vehicles are listed in the table below. Detailed function diagrams and the pros and cons of each type of EV are included in Annex VII. At the same time, because FCEVs have not actually been placed on the market, they will not be included in this chapter’s analysis, which will focus on BEVs, HEVs and PHEVs.

Perspectives HEV BEV FEV Propulsion Pattern ICE + electric motor Electric motor Electric motor

Energy System ICE + battery Battery Fuel cell Charging Pattern Gas station or

charging facility Grid, charging facility Hydrogen

Emissions Low Zero H2O Marketing Phases Relatively mature

market Limited production R&D stage

Main Advantages High driving mileage Low emission High efficiency, high driving mileage

Main Disadvantages

Low battery efficiency Insufficient charging stations, insufficient battery safety

High cost, immature technology

Figure 71. Comparison of HEVs, BEVs and FEVs.


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2. The Electric Vehicle in China: Why? The three main goals for the Chinese government are:

• To decrease dependence on imported oil, which could put China in a risky situation. • To reduce pressure on the environment, a serious problem in China. • To drive China towards clean technology leadership.

As shown in the graph below, global CO2 emissions increased in 2015 by just 0.1%. These emissions were the highest in human history and 58% higher than in 1990 (the Kyoto Protocol reference year). According to BP statistics, China is the largest emitting country, contributing 27% of global CO2, last year though emissions from China were lower (-11.6 mt, -0.1%), having declined for the first time since 1998. [14]

Figure 72. Global CO2 emissions from fossil fuel use and cement production by region. Source: BP Statistical Review of World Energy.

Furthermore, if we focus on each polluting sector, it is obvious that road transport has been the biggest contributor to CO2 emissions. China could see its mobile CO2 emissions account for nearly a quarter of global emissions by 2020. [15] See Annex VI: An Atlas of Pollution: The World in Carbon Dioxide Emissions for a 2009 global ranking of polluting countries.


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Figure 73. Chinese CO2 emissions from different sectors. Source: Report on Chinese Low Carbon Economy Development 2015.

The EV could potentially be a good solution in China. Research has shown that pure EVs could cut the CO2 emissions of an internal combustion engine (ICE) by about 40%. They could also reduce carbon monoxide (CO) emissions by up to 99% and cut nitrogen monoxide (NOx) pollution in half. Plug-in hybrid electric vehicles also have a track record of reducing emissions of both CO and NOx by roughly 75% and 40%, respectively. On the other hand, some detractors stress that, though EVs may have better performance and generate less pollution, the electric cable must be followed from the charging station to the electric power station to understand that the coal used in some of the thermal plants pollutes in the same way or even worse because of the sulfur content. This is one of the most important problems, since around 70% of electricity in China is generated from coal thermal power plants and Chinese coal has high sulfur content. A greater degree of vehicle electrification can help reduce urban pollution from car exhaust. However, given around 80 percent of China’s power is supplied from fossil fuels, the well-to-wheel reduction in CO2 emissions of EV is only 29% less than that of ICE. EV adoption will therefore likely not have a significant impact on China’s overall greenhouse gas emissions. [16]

The following graph shows the trends in Chinese CO2 emissions and how EVs could reduce them in the future, while also reducing NOx and CO.

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Figure 74. EVs could significantly reduce carbon emissions and air pollution. Source: “Recharging China’s Electric Vehicle Aspirations,” McKinsey & Company, April 2012.

Due to quickly rising emissions, China announced a plan in November 2009 to reduce CO2 emission intensity from 2005 levels by between 40% and 45% by 2020. Among other measures, the plan relies on the EV decreasing CO2 levels to produce cleaner, more breathable air in polluted Chinese cities and represents a good chance for China to assume a leading position in the world EV sector. According to a 2010 Deutsche Bank report, China and Germany are leading the “Race for a Green Economy,” unlike the United States.

Besides environmental factors, another important factor is China’s high dependence on imported oil. The graph below shows China’s imported oil dependency rate. In 2012, the dependency rate reached 57%, 7% above the internationally accepted alarm level. Moreover, China is also the world’s biggest oil importer as it can be seen in the next page’s graph.


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Figure 75. Chinese dependency rate on imported oil. Source: Chinese State Statistic Bureau.

Figure 76. China has become the world’s biggest importer of oil and the 6th largest importer of natural gas. Source: “Mckinsey China Electric Vehicle Report,” McKinsey & Company, April 2015.

Based on current projections, a study by McKinsey & Company indicated that China’s oil consumption could reach a quarter of current world production by 2025. And since domestic production is largely constrained, almost all the additional oil must be imported.This leaves China in a risky situation. Furthermore, if China achieves a level of per capita income similar to other developed countries, its demand for oil will be higher than total global production. It seems logical to assume that EVs could be more than just a green vehicle. They could become an important economic issue for the future of China.


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Figure 77. China’s oil demand could reach a quarter of current world production by 2025. Source: “Mckinsey China Electric Vehicle Report,” McKinsey & Company, April 2015.

Finally, the electric vehicle could be an excellent opportunity for Chinese local automotive brands. Foreign brands have taken the upper hand in the conventional automotive market in terms of vehicle sales, technology and innovation. Their superiority will not be easily overcome by Chinese brands in the short term. However, the NEV segment does not have a long development history and some Chinese local OEMs have already stepped in and achieved considerable results in certain core technologies. This could be a shortcut to help the Chinese automotive industry establish global core competitiveness in both the short and long term.


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3. Development of the Chinese EV Market In the history of the EV market in China, the idea of building electric vehicles was first mentioned in the eighth five-year plan33, when EVs were included in the Chinese National Plan for Science and Technology Development. A continuous effort was made in the next five years, and the EV was considered one of the most significant technological programs in the ninth five-year plan and given full support from the Chinese government. In the tenth five-year plan, the Chinese government established further development scenarios for electric vehicles, known literally as “three-vertical, three-horizontal” to make essential achievements in HEVs, BEVs and FCEVs (the three vertical elements), and the battery, electric motor and electric controller (the three horizontal elements). The eleventh five-year period can be seen as a boom time for Chinese EV development because huge funding was pumped into R&D for technological platforms and core EV parts, and many incentive policies were implemented to encourage EV development. For five years under these favorable domestic conditions, Chinese automotive OEMs began to launch or enrich their electric vehicle product lineups. BYD launched its F3DM HEV model in 2008, which was followed by Geely’s EK-1BEV model, FAW’s B50PHEV HEV model and Chery’s A3ISG HEV model, among others. Currently some of the most popular electric cars include BYD EV300, DongFeng S500-EV and QOROS 3 Q•LECTRIC. [17]. Chinese OEMs seemed to gain confidence from government support and the general public’s increasingly positive reaction towards EVs. In 2014 and 2015 sales and production of PHEVs and BEVs soared. In 2015, the production of PHEVs and BEVs reached 340,000 units with an annual increase of 330%; sales reached 330,000 units.

Figure 78. PHEV and BEV production from 2010 to 2015. Source: Prepared by CEIBS and CEDARS based on the CAAM 2010-2015 databases.

33 The eight five year plan took place between 1991 and 1995, the ninth five year plan between 1996 and 2000, the tenth five year plan between 2001 and 2005, the eleventh between 2006 and 2010. Currently we are in the thirteenth five year plan (2016-2020).

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Figure 79. PHEV and BEV sales from 2010 to 2015. Source: Prepared by CEIBS and CEDARS based on the CAAM 2010-2015 databases.

The main reason behind the surge of New Energy Vehicles is that the central and local governments have been heavily subsidizing both private buyers and commercial users (e.g. bus operators). In 2015, the passenger and commercial NEV sales reached 207,382 units and 123,710 units respectively, with a spit of 63% to 37%. However, commercial NEVs grew as much as 590% from a year ago, outperforming passenger NEVs’ 280% growth rate. On the passenger NEV side, the four megacities (Shanghai, Beijing, Guangzhou and Shenzhen) continued to lead China’s green revolution. Their combined passenger NEV sales rose from 19,000 units in year 2014 to 90,000 units in year 2015. Meanwhile, smaller municipal governments also joined the NEV bandwagon and provided various incentives to buyers. In 2014 only ten Chinese cities sold more than 1,000 units each, but the number increased to 29 a year later. At the present time, the main automotive OEMs in China able to produce BEVs include JAC, Denza, BYD, Chery, Kandi, BAIC, Changan and Zotye; the main automotive OEMs in China that can produce HEVs include BYD, DFM, GAC Toyota, Brilliance, Chery, SAIC, SAIC-GM, FAW-Toyota, Geely and Changan. In terms of the battery, electric motor and electric controller, SAIC and GAC have the ability to develop these “three-horizontal” elements while other companies, such as Chery and Brilliance, are attempting to develop controlling system with their parts suppliers. In terms of market share of the HEV market, FAW-Toyota and GAC-Toyota kept ahead of other Chinese local companies in terms of production volume in 2012. They were also able to produce core parts for HEVs. On the BEV market, the annual production volume of Chinese brands such as JAC and Chery was much higher than other brands’. The graph below shows the top brands on the BEV market in 2015 in terms of sales volume.

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Figure 80. Top passenger BEV brands in terms of sales volume in 2015. Source: Prepared by CEIBS and CEDARS based on the CPCA database.

According to the Developing Plan for Energy Saving and the New Energy Vehicle Industry (2012-2020), new energy vehicles, including PHEVs and BEVs, would reach cumulative production and sales of 500,000 units by 2015, and 5 million units by 2020. Between 2009 and 2015, China produced a total of 497,000 NEVs and almost completed the 500,000-unit goal set by the central government (cumulative NEV sales came a bit lower at around 450,000 units). So this should be considered a success. From the global perspective, China accounted for 17% of the world’s passenger NEV sales in 2014, which rose to 32% in 2015 and further to 39% in H1 2016. China took five berths on the global top 20 passenger NEV makers list in 2014, which rose to seven in 2015 and further to nine in H1 2016. (See that the figure above only includes BEV Brands). The 5-million-unit target was first set by the State Council under the Development Plan for Energy Saving and New Energy Vehicle Industry (2012-2020), and was recently reiterated under the 13th National Five-Year Plan (2016-2020). That means the Xi-Li administration is very serious about it. More importantly, Chinese central government has taken the following concrete measures, among others, to prop up the NEV market:

• In July 2014, the State Council announced that BEVs and PHEVs will be exempted from the 10% sales tax during September 2014 and December 2017, and that local protectionism should be removed by unifying national NEV product catalogue and charging standards.

• In April 2015, four ministries launched the NEV fiscal subsidy policy for 2016-2020. Chinese central government alone is expected to subsidize up to 218.7 billion RMB during these five years, not taking into account local government grants, according to Cui Dongshu, the secretary-general of China’s Passenger Car Association.

• In June 2015, the National Development and Reform Commission and the Ministry of Industry and Information Technology said that non-automotive companies (including Internet firms) will be able to apply for a battery electric vehicle production license.

• In October 2015, four ministries released the guidelines for EV charging infrastructure development (2015-2020), aiming to construct 12,000 stations and 4.8 million stakes across the country.

• In February 2016, the State Council required that NEVs should account for at least 50% of all new vehicles purchased every year by central government departments and some key cities’ publicly funded institutions.

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Zotye! Kandi! BAIC! Chery! JAC! BYD! ZD! JMEV! Denza! Changan!(Units)!©"CEIBS,"Shanghai""2016"


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Government Initiatives The Chinese government has attached great importance to supporting the EV industry by providing incentive policies for automotive OEMs and consumers. This support has come from the central government and local governments.

Central Government Initiatives

The central government issued policies for the EV industry on almost a yearly basis during the periods of the eleventh five-‐year and twelfth five-‐year plans. In the eleventh five-‐year period, the government first clarified the definition and scale of EVs, and then named 13 model cities in China to popularize EVs with the public. The central government called it the Ten-‐City 1,000-‐EV Plan, which aimed to achieve sales of 1,000 EVs the following year in 10 new cities that met the qualifications to become model cities. In 2010, the central government issued detailed incentives for EV purchasing and granted subsidies to consumers depending on the type of vehicle they purchased.

In the twelfth five-‐year plan, the Chinese central government expanded on its previous efforts by increasing the number of model cities to 25. At the same time, the Technology Department issued the EV development plan in 2012. According to Bloomberg reports, this plan indicated the government’s commitment to expand existing EV pilot programs, increase investment in recharging infrastructure and introduce new battery recycling programs. In 2013, the second round of subsidy schemes was released with the aim of scientifically improving EV sales.

In 2015, the State Council announced the ‘Made in China 2025’ policy. Its aim is that Chinese brands sell three million NEVs a year by 2025. Also, the NEV Fiscal Support Policy 2016-‐2020 was released. At the same time, the Ministry of Industry introduced the Administration Rules of New BEV Manufacturers. This rule allows qualified ‘outsiders’ to make battery electric passenger vehicles. The table below shows the main policies in the last 10 years.

Year Policy Issued by Main Content 2007 Admittance Standard

Management for NEV Production

Development and Reform Commission

Clarification of the definitions and scale of NEVs in China.

2009 Restructuring and Rejuvenation Guidelines for the Chinese Automotive Industry

State Council Plan for NEV subsidy; Clarification of the short-‐term target for NEV development.

2009 Notice on the Launch of Pilot Projects for Energy Saving and New Energy Vehicles

Ministry of Finance; Department of Science and Technology

13 cities designated as pilot cities to popularize EVs.

2010 2010 NEV Subsidy Scheme

Ministry of Finance; Development and Reform Commission

Clarification of detailed subsidies for each type of NEVs.

2012 Development Plan for Energy Saving and New Energy Vehicle Industry 2012-‐2020

State Council Plan to achieve cumulative production 5 million NEVs by 2020.


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2013 NEV Subsidy Scheme 2013

Ministry of Finance; Development and Reform Commission

Clarification of detailed subsidies for each type of NEVs; Sales targets set for pilot cities (2013-‐2015).

2014 Guidelines on Accelerating Promotion of New Vehicles

State Council Building up charging facilities; fiscal support; removing local protectionism

2015 ‘Made in China 2025’ State Council Chinese brands to sell 3 million NEVs a year by 2025

2015 NEV Fiscal Support Policy 2016-‐2020

Four ministries NEV subsidy to be 20% lower in 2017-‐2018 and to be 40% lower in 2019-‐2010, versus the 2016 level

2015 Administration Rules of New BEV Manufacturers

Ministry of Industry; Development and Reform Commission

Allowing qualified ‘outsiders’ to make battery electric passenger vehicles

Figure 151. Recent policies from the Chinese central government.

From the consumer’s perspective, the subsidy scheme is the most important factor to potentially influence the EV purchasing decision. The Chinese government has made a great effort to encourage customers to purchase new energy vehicles (NEVs). The NEV Fiscal Support Policy 2016-‐2020 a new round of subsidies was released with the aim of promoting EV sales. The new incentive scheme ensures the relative amount of subsidy customers receive when they decide to purchase different types of EVs. Compared to the previous subsidy scheme released in 2013, this new scheme has several differences that are worth mentioning. First of all, the subsidy of the segmentation has changed. The amount of the subsidy is still determined by the driving range exclusively powered under pure electric mode. For example, when purchasing an electric vehicle with a driving range of 100 to 150 kilometers, only 25,000 RMB can be subsidized, while a subsidy of 55,000 RMB is provided by the central government when an EV with a driving range of over 250 Km kilometers is purchased (see figure 152). The 2016-‐2020 policy is implemented on the whole country and not only on highly polluted areas. Therefore, the new scheme is more focused on function, which may directly or potentially lead to the development of EVs and help promote technological innovation by OEMs. In addition, unlike the 2010 scheme’s method of allocating the subsidy to local governments, under the new scheme, the subsidy is directly allocated to NEV OEMs, which prevents regional protection by some local governments and speeds up EV penetration to private consumers. Moreover, the guidelines also call on the central and local governments to shift their focus to EVs when making vehicle procurement decisions. At least 50% of the vehicles that are replaced and newly procured every year must be NEVs; this point was only minimally regulated in the previous scheme. Finally, from 2016 to 2020, the subsidy received by EV purchasers will be 20% lower in 2017-‐2018 and to be 40% lower in 2019-‐2010, versus the 2016 level. The table below shows the main differences between the 2010, 2013 and 2016 subsidy schemes.


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Figure 152. Comparison of the 2010, 2013 and 2016 subsidy schemes. Source: Based on Media Reports.

Local Government Initiatives

Local government initiatives can be grouped in three categories: financial subsidies paid to EV purchasers, priority given to new energy vehicle registrations, and infrastructure construction plans.

Besides the subsidies provided by the Chinese central government, the financial EV subsidy scheme from local governments offers another sum of money for purchasing an EV. The amount of these financial incentives varies from city to city, and the vehicle models qualifying for subsidies from local governments are not necessarily the same ones as those qualifying for subsidies from the central government. For example, in 2014, the Beijing government offered the same subsidy amount to EV purchasers as the central government, but only compact BEVs qualified and HEVs were completely excluded. However, the Shanghai government had provided subsidies of 30,000 RMB per HEV and 40,000 RMB per BEV in 2012.

Car registration is currently a major problem for car buyers, especially those who want to register their vehicles with local vehicle license plates. In big cities such as Beijing, Shanghai and Guangzhou, license plates are assigned in lotteries and auctions. However, the chances of winning local license plates are extremely small, e.g., only 1% in Beijing, and the auction price was more than 80,000 RMB in Shanghai in 2016. Nevertheless, the situation is completely different for EVs. In some local governments, EVs have priority in car registrations. For example, qualifying EV models in Shanghai can acquire free license plates without attending auctions.

Finally, the local governments are trying to set up sufficient charging stations and other fundamental infrastructure to satisfy charging demand from EV purchasers. The following table demonstrates local governments’ efforts to popularize EVs.

2010 Scheme Applicable Year(s) 2010-2012 2013 2014 2015 2016 2017 2018 2019 2020

Subsidy Based on Battery storage

Subsidy for PHEV (Range�50km)

Maximum: �50,000 ��3,000/kWh� �35,000 �33,250 �31,500 �30,000 �24,000 �24,000 �18,000 �18,000

Subsidy for BEV (Range: 80-150km) �35,000 �33,250 �31,500 - - - - -

(Range: 100-150km) - - - �25,000 �20,000 �20,000 $15.000 $15.000

(Range: 150-250km) �50,000 �47,500 �45,000 �45,000 �36,000 �36,000 �27,000 �27,000

(Range: �250km) �60,000 �57,000 �54,000 �55,000 �44,000 �44,000 �33,000 �33,000

Subsidy for FCEV None �200,000 �190,000 �180,000 �200,000 �200,000 �200,000 �200,000 �200,000

Subsidy Allocated to Local governmentsSubsidy Implemented in 25 pilot cities

Gov't Procurement N/A NEVs account for more than 30% NEVs account for more than 50%

2013 Scheme 2016 Scheme

NEV OEMs NEV OEMs

Electric driving range Electric driving range

Focus on highly polluted areas Countrywide

Maximum: �60,000 ��3,000/kWh�


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Figure 153. Initiatives of major local governments.(Note: CG=central government; LG=local government).

Some experts argue that in order to boost the innovation and competitiveness of the industry it is necessary to open the market to overseas competitors. The reduction or elimination of import tariffs on EVs in China might represent an opportunity to further accelerate EV adoption. While some countries like China, impose high tariffs on imported cars, many have exempted EVs from tariffs to ensure the availability of attractive EV products at locally competitive prices (Exhibit 15). Countries like Israel impose tariffs as high as 72% for ICEs, but reduce them to as low as 12% for EVs. 34

34 “Mckinsey China Electric Vehicle Report,” McKinsey & Company, April 2015.

City 2015)Passenger)NEV)Sales)(Unit)

Market)Share 2016)Subsidy NEV)Registration Infrastructure)Construction

Shanghai 43.471 22% LG:CG2(lower2than21:1) Free2NEV?exclusive2license2plates21,7002charging2piles2by2end?2015;2will2rise2to2211,0002by22020

Beijing 19.130 9% LG:CG2(1:1)2for2BEV;2No2LG2subsidy2for2PHEV

60,0002NEV2licenses2allotted2(85%2private;25%2corporate;210%2bus)

21,0002charging2piles2by2end?2015;2will2rise2to2456,0002by22020

Shenzhen 18.213 9% LG:CG2(higher2than21:1) Direct2registration2without2going2through2lottery2or2auction2system


Hangzhou 11.850 6% LG:CG2(lower2than21:1) Direct2registration2without2going2through2lottery2or2auction2system


Changsha 10.796 5% LG2not2announced2yet N.A. N.A.

Qingdao 9.800 5% LG2not2announced2yet N.A. 9,0002charging2piles2by22015;2will2rise2to249,0002by22020

Guangzhou 9.294 5% LG2not2announced2yet Direct2registration2without2going2through2lottery2or2auction2system

2,0002charging2piles2by22015;2will2rise2to234,7002by22018

Linyi 7.474 4% LG2not2announced2yet N.A. 39,0002charging2piles2by22020

Wuhan 6.417 3% LG:CG2(1:1) N.A. ~2,0002charging2piles2by22015

Tianjin 5.865 3% LG:CG2(1:1) Direct2registration2without2going2through2lottery2or2auction2system

6152charging2piles2by2mid?2016;220,0002by22020

Chongqing 4.268 2% LG2not2announced2yet N.A. 4052charging2piles2by22015;2150,0002by22020

Lanzhou 3.929 2% LG:CG2(lower2than21:1) N.A. N.A.

Ningbo 3.882 2% LG2not2announced2yet N.A. 792charging2piles2by2end?2015;2will2rise2to242,0002by22020

Wuhu 3.463 2% LG:CG2(1:1) N.A. <1,0002charging2piles2by22015

Xi'an 3.288 2% LG:CG2(1:1) N.A. 3,5002charging2piles2by22015;242,8002by22020


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Figure 154. Difference between subsidies in China and US for imported vehicles. Source: McKinsey report US IRS.

Figure 155. Tariffs on imposed cars. Comparison between different countries. Source: McKinsey Report, April 2015.


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5. Future Perspectives If we take a general look into the global light vehicle industry in the next 30 years, the situation seems a bit uncertain. Although some changes are expected to be held in the near future (depending on the model of transportation), the truth is that we cannot say much about the long-term future. It seems that powertrains and fuel choices will be in the spotlight and that advanced battery vehicles will have a vital role to play. Moreover, digital disruption will play a crucial role in the industry. Connectivity and digitalization have outpaced growth in emerging markets and alternative drivetrain technologies as the key trend dominating the executives strategic agenda until 2025. [19] The internal combustion engine will continue to improve and evolve through advances in emission control and fuel efficiency. The hybrid auto seems the first step for those betting on an electric future. In the future, it is likely that both BEV and PHEV-based EVs will continue to provide competitive offerings. [20] From the point of view of customers, there are two main drawbacks: cost and convenience. Despite some of the policies adopted by the government, electric autos are more expensive than conventional ones. There is also a need for recharging stations because not enough stations have been built. All these factors make buyers unenthusiastic about the EV idea. But some of the non-financial incentives like the free license plate and the fact that the prices are getting more competitive are boosting the demand of EV in first tier cities. From technology, there are still several hurdles to be overcome. Investments made by companies and the government have not focused in the right direction. According to the McKinsey Report, China has already invested over RMB 37 billion in government investment for EVs, including R&D grants for OEMs, suppliers, and research institutions; charging infrastructure investments from SOEs; and purchase subsidies and tax breaks for consumers. Nevertheless, its global ranking in EV ecosystem development has fallen despite improvements in its overall score. It is hard to provide guidelines on new technologies and only a few companies such as BYD can currently show off their finished developments. In the end, the data revealed that the 500,000 EVs target by 2015 was almost achieved. Whether the 5 million target of 2020 will be met is hard to foresee. Many experts think that the EV alone cannot move China into a green mobility society. Other actions are needed such as providing incentives for cleaner combustion engines. Officials have admitted that progress has been slow, and developers need to improve quality instead of rushing models to market. Michael Dunne, the president of Dunne & Co. Ltd., said, "China has run up against the same technical obstacles as anyone else. They said, ‘Hold on. Maybe we shouldn't marry ourselves to electrics just yet. Let's look at the alternatives. Maybe we have to take an incremental approach, just like everyone else.'"

Fossil Hybrid Electric


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Figure 86. Evolution from fossil fuel vehicles to electric ones. Source: UCAR/Teeswater/Nutshellonline35

Mr. Hou Fushen, deputy secretary-general of the Society of Automotive Engineers of China (SAE-China), said in July 2016 that there is a technological gap of only two to three years (or a half product generation) between Chinese and global battery electric passenger cars. Chinese BEVs can deliver similar driving range and speed performance, although they still have room to improve in terms of efficiency, acceleration and cost.

Figure 87. The technical gap between Chinese and Global BEVs. Source: the Society of Automotive Engineers in China. For more technical details on different green technologies, see Annex VII: Green Energy Vehicles.

35 IHS is a global information company with world-class experts in the pivotal areas shaping today’s business landscape: energy, economics, geopolitical risk, sustainability and supply chain management.

Brand Model Range,(km) Batteries,(kWh)BYD E6 300 61Tesla Tesla,Model,S,(60kWh) 375 60Tesla Tesla,Model,S,(85kWh) 500 85SAIC E50 120 18BAIC E150,EV 200 30Nissan Leaf 160 24

Brand Model kWh/100km Weight,(kg)BYD E6 19,5 2380Tesla Tesla,Model,S,(60kWh) 18,8 2108Tesla Tesla,Model,S,(85kWh) 18,8 2108SAIC E50 11,6 1080BAIC E150,EV 15 1350Nissan Leaf 11,4 1493N1515,(USA)

Brand Model Top,speed,(km/h) AccelerationBYD E6 140 14,(0N96)Tesla Tesla,Model,S,(60kWh) 190 5.9,(0N96)Tesla Tesla,Model,S,(85kWh) 200 5.9,(0N96)SAIC E50 130 14.66,(0N100)BAIC E150,EV 125 NJAC IEV5 120 NNissan Leaf 145 11.5,(0N100)

1.#Driving#Range

2.#Power#Consumption

3.#Vehicle#Performance

Brand Model Price-(RMB) Comparable-Gasoline-Model Comparable-Price-(RMB) Price-Gap-(%)BYD E6 300.000 Sirui 100.000 200%Tesla Tesla-Model-S-(60kWh) 437.000 BMW-M3-Coupe 377.000 16%SAIC E50 234.900 MG350 75.700 210%BAIC E150-EV 220.800 E150 60.000 268%Nissan Leaf 176.000 TIIDA 110.000 60%

4.#Purchasing#Cost


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V. CONCLUSIONS China’s auto market has grown exponentially in the last decade, particularly since China’s accession to the WTO in 2001. China was ranked first in automobile sales and production in 2015 for the seventh consecutive year, with about the same amount of sales and production. But production is still far from its maximum capacity and experts think that the Chinese auto industry especially the truck and bus segments will have to deal with overcapacity in the future. The Chinese auto industry is still young and on its way to becoming a mature market. This is evident if we compare the vehicle-to-population ratio in China with that of developed markets. Because of major differences between different parts of the country, the increase in automobile sales in the biggest Chinese cities (first-tier cities) has collapsed as local governments are curbing car ownerships to ease air pollution and traffic congestion, so companies are now focusing their efforts on second- and third-tier cities.

The Chinese government has included the automotive industry among its main pillars that support the development of the national economy. The central government stimulates and controls the industry with different plans, such as the ongoing NEV subsidy policy, the small car tax breaks announced in 2009 and 2015 respectively, and the energy-saving incentiveplan in 2011. The government has tried to help Chinese companies with these schemes, but foreign companies with their JVs have also benefited. The subsidies for the EV are increasing its demand and popularity. In 2015, China became the biggest market for EV cars in the world.

There are around 70 carmakers in China according to IHS Automotive. Unlike countries with the largest production, such as the United States and Germany, Chinese brands only accounted for 50%36 (42% for passenger cars) of local production in 2015. And some auto specialists predict greater losses of market share in the future. One reason for this is that Chinese companies are technologically weak. When the government established the JV policy, it hoped that JV partners would help Chinese companies learn about technological development. Unfortunately, this was not the outcome, and Chinese automakers have not been able to compete with foreign companies. The development of electric and smart vehicles is an opportunity for the Chinese OEMs to lead the global automotive industry. Along with the traditional OEMs, other startups such as NextEV, Faraday, and Mobility Future Corp. want to drive the market.

In general, Chinese autos do not have a good brand image abroad or even in China, where local people still trust foreign brands more than Chinese ones. Domestic brands need to put more effort into R&D to design better technologies that can make them more independent and improve safety and quality. However, the quality gap between foreign and Chinese brands has been reduced considerably in recent years according to J.D. Power.

The Chinese auto industry is facing serious challenges, such as competition between brands, the proliferation of new products and, of course, changing consumer needs and behaviors. Chinese customer satisfaction and brand loyalty will be critical for success in this market, and this should be taken into account in the future. In the last years, foreign 36 This percentage was calculated based on units and considering Wuling as part of SAIC Motor.


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companies have also put their efforts on the low-cost auto market, thus gaining market share in this market segment. On the other hand, the Chinese brands hold a high market share in the booming SUV and MPV sectors. Now, foreign brands aware of this trend are also focusing their efforts on the two sectors.

According to financial reports, most of these companies were profitable in 2015. But if we take a closer look, we find that they would not have been able to survive without government subsidies and the profits made by their foreign partners. Of the 15 main Chinese companies studied in this report, only five are private (only around 20% of Chinese auto companies are now private). We can see how difficult it can be for private enterprises to survive in a market largely controlled by the government. However, private automakers attach great importance to technological development to improve their competitiveness. Also, they acquire their core competency through precise market segmentation. Examples such as BYD in the NEV segment and Great Wall in the SUV segment are mentioned in the discussion. Moreover, private OEMs tend to have a more open-minded & incentivized management team, while SOE senior officials are nominated by the government and subjected to strict salary caps (likely causing rent-seeking and corruption). In the future, SOEs are expected to be vigorously challenged by private auto OEMs as the Chinese cabinet may phase out its decades-old 50:50 JV shareholding rule, thus creating a freer and fairer market environment.

Exports are still very small compared to domestic sales. However,automakers will inevitably give more priority to globalization as Chinese market slows down. Chery, JAC and other Chinese brands dominate the export,but they will not massively reach European or American markets in the short term since the quality of their products is still far from achieving the standards required in those markets. Moreover, consumers still have a bad perception of Chinese brands. But Chinese companies are exporting to other countries in Africa, Eastern Europe, South America, and Asia, where standards are not so strict. Export destinations are changing very fast due to geopolitical and economic reasons as well as foreign exchange risks. Another fact is the rising number of trade barriers (e.g., Algeria has decreased its imports quota due to weak oil prices; and Russia, a country which used to be the main market for Chinese brands, has also raised its barriers). The upside for exporters is that Chinese government has announced its ambitious “One Belt, One Road” initiative, aiming to facilitate overseas trade and investment.

The parts industry has gone through profound development in keeping with the automotive industry. However, Chinese players cannot compete with foreign brands on the parts market concerning technology and brand reputation. They keep losing market share and in some core parts industries, market share is entirely captured by foreign brands. Chinese brands seem to be interested in competing on price rather than quality and technological development, which leads to more trade frictions (e.g. USA antidumping & countervailing duties on Chinese tires). However, Chinese companies are aware of the situation and are trying to step into the global stage through international M&A. Through global integration, more advanced know-how could be gained regarding technology and management capabilities, which could be beneficial for Chinese automotive parts companies when trying to capture domestic market share in the future.

The Chinese government has encouraged the development of new energy vehicles and


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named it as one of the ten key industries under the “Made in China 2025” national plan. The entry of Tesla and cooperation between Chinese and foreign companies (e.g. between BYD and Daimler/Samsung) could further promote the development of the EV industry. Regarding charging facilities, the construction of large-scale infrastructure for this type of vehicle is currently being developed. According to a McKinsey report by the end of 2014, the government had spent 37 Billion RMB of which 15 billion were invested in subsidies for consumers and 11 billion in electric infrastructures. Recently a plan of the central government to spend over 200 Billion RMB during the next 5 five years was made official by four ministries. This huge investment indicates the governments’ firm resolution to develop the Chinese EV industry.

Regarding the strategic shift towards e-mobility that the government is leading, it may pay off. Today's economies are changing, triggered by development in emerging markets, sustainability policies, the accelerated rise of new technologies, and changing consumer preferences around ownership. Digitization and new business models are changing the industry. For the auto sector, these forces are giving rise to four disruptive technology-driven trends: diverse mobility, autonomous driving, electrification, and connectivity.


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Acknowledgements I would like to extend my gratitude to all individuals who helped make this project possible. I particularly want to thank my tutor of this project; Pere Grima gave me his support, confidence, and understanding through the whole project.

I would love to thank Professor Ribera and Cristina Castillo from CEIBS that have lead the project and looked for deeper insides and analysis. As well as the whole team of CEIBS with which I worked, their help, kindness and sympathy were the daily support that made this adventure remarkable. It has been a real pleasure to work with them.

Also, Donald Zhang from CEDARS has been an outstanding source of help. He is an expert on the automotive industry and knew the answers to some of the most difficult questions.

Last but not least, I want to thank my family and friends for supporting this project. Without them this journey that I took many years ago would not have been possible.


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Complementary Bibliography

[1] Fourin. 中国汽车零部件产业 2015。Beijing. Automotive car part’s industry yearbook.

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The Chinese Automotive Industry TFG 1.0