China automobile

Historic Development

1953-65 • Initial Stage

1966-80 • Growth Stage

1981-90 • Open Market Stage

1991 • Comprehensive Development

NOW • Current State of Economy

Historic Development Current State VW competitive position VW versus GM Future Development Conclusion

1. Initial Stage 50s – mid 60s

• Factories job was to copy and assemble automobiles.

• By 1965, 21 plants


2. Growth Stage mid 60s – early 80s

• Government’s policy was to construct Regional Industries.

• By 1980, 53 plants out of 2379 enterprises 12.5% sedans

3. Open Market Stage mid 80s – early 90s

• Radical restructuring.

• Increased investment to meet demand.

• Introduction of foreign technology, foreign technology and management support.


4. Comprehensive Development since 90s

• Automobile industry became core part of Chinese economy.

• 15% Average annual growth.

• Enterprises are forced to improve products and service quality.

• Switch from trucks to sedans.

Market Restrictions

• Foreign companies were only allowed to make joint ventures of no more than 50% with local companies and localize 40% of the parts and components to encourage the local industry.

• High protectionism measures

• Government was keeping brakes on the market

• Regardless of their ranks, Government Employees were banned from purchasing cars

• Imports quotas and tariffs

• Non-attractive market due to Consumer behaviors:

1. Preferring cash purchases

2. Preferences made on emotional factors and intangible attributes rather than efficiency or speed


Market Structure

Global 6 + 3

Large Motor Groups

Independent Manufacturers

China 3 + X

FAW

DFMC

SAIC


Current state of the Economy

6 + 3 Status

Guiding Principles:

• Form larger competitive groups

• Strategic reorganization

• Intensive R & D

• Start International cooperation

Current state of the Economy Historic Development Current State VW competitive position VW versus GM Future Development Conclusion

3 + X status • First Automobile Workshop FAW

10 b$ revenue 22 joint ventures – includes: Audi & Mazda

• Dongfeng Motor Corporation 6 b$ revenue joint ventures: Nissan, Citroen & Kia

• Shanghai Automobile Industry Corporation SAIC the biggest group in china, >10 b$ revenue strong ties with government officials 52 joint Ventures: VW & GM


Current state of the Economy “2004”

• Enterprises: majority are state owned account for 30% of production

• Sales: 4.44 million units

• Imports and Exports, 2003: import: 171,903 units of 5.29 b $ export: 47,439 units of 370 m $ in 2006, reached 340,000 units


Sedans 45%

Passenger Cars 27%

Trrucks 28%

2004 Sales ratios

104 522

1228

2904 2596 2326

0

1000

2000

3000

4000

19

56

19

60

19

65

19

70

19

75

19

80

19

85

19

90

19

95

20

00

Enterprises Number

EnterprisesNumber

Current state of the Economy


Joining WTO, 2001 • Decrease tariffs 10% annually for sedans

and 4-8% for trucks and passenger cars.

• Complete cancellation of quotas in 5 years.

• Cancellation of restrictions of importing critical parts.

• Allowance of 100% FDI

• Adoption of international after-sale services

• Removal of protectionism


What worked for VW up till 2004?

Hig

h g

row

th &

dem

and

in C

hin

a •Middle class income jumped from USD $ 460- $1091

•Option of car financing by state owned banks

•30% annual growth rate

Stro

ng

allia

nce

wit

h S

AIC

•SAIC is a SOE

•Strong policy support

•Localisation with local suppliers with SAIC support

•Domestic content soared to 70% in early 90s

VW

Str

ateg

y •First Mover advantage

•Simple technology, simple product

•High German Quality

•Low investment for distribution network

•High op. margin: 30% vs. R.O.W 5%


VW Competitive Position by 2004 • Summer 2004 VW faced critical issues:

High Cost structure Weak Sales and product

teams

Changing Market; market share plunge to

16%

Change in Customer Profile: Simple

technology, simple products strategy no

longer works!

Losing First Mover Advantage!


VW Change Management Programme

• “Start from Zero” change management programme

• Marcus Schütz, Director was tasked to design and implement change initiatives over next 3 years.

• Develop new set of success factors that is sustainable!


VW Dilemma

Sales infrastructure

• Reselling and distributing done by SAIC a failure

• Lack of control of S&M

• SVW Sales Corporation: 24 RSSCs and 700 dealers too late

• B2B to B2C structure

FAW vs. SAIC

• Bitter competitors

• Separate distribution networks and supply bases

• Impossible to create synergies btw SAIC and FAW

• High cost management

Modification of Product Strategy

• German standards= overdesigning

• Little flexibility for consumer preferences

• CKD transfer to local bases

• Weak negotiation point


GM’s issues


Slow turnaround time

Poor business strategy

Burdened with high cost eg pensions benefits

Financial crisis and prospect of bankruptcy

VW vs. GM in China

• First mover advantage

• S&M retrieved from SAIC too late

• Fear of losing technology advantage

• German Quality standard=overdesign

VW

• S&M in their control from day one

• Channel of technology transfer

• Left localization to local automakers

• Build a component industry GM


China automobile

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