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Domestic carmakers: too many, too slack
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There are currently too many domestic original equipment manufacturers in China. The central government has been talking about consolidation for more than 10 years, but the number of Chinese carmakers has actually increased. One reason is that local governments want their carmakers to thrive and support them in many ways. In this regard, the automotive industry is similar to other industries in China.
The average capacity utilization across all industries stood at 57 percent in 2013, while the car industry’s capacity utilization stood at 65 percent, including the performance of joint ventures. Without the joint ventures, the average capacity utilization of the Chinese carmakers would be only 38 percent, not significantly better than that of solar panel makers. The average capacity utilization of joint ventures stands at 89 percent, well above the 80 percent needed to make money sustainably.
Being state-owned doesn’t seem to help. The biggest three Chinese passenger car companies in 2013 were the privately owned Great Wall, Geely and BYD. We don’t include minivans in these numbers because they yield only very low margins, if any at all.
Including pick-up trucks, Great Wall made about 750,000 vehicles last year, which, of course, pales in comparison with Toyota’s 10 million vehicles in the same period. Great Wall is trying to increase its average sales price of 98,000 yuan (US$16,000) to close the gap with the 178,000 yuan average price of joint ventures. Great Wall seems to be struggling with that, though. The Haval H8 has been delayed due to problems with which owners of a vehicle that cost more than 200,000 yuan would take issue. Great Wall probably doesn’t have the financial resources at this time to reach that high and will have to approach that price level over a longer period. It remains to be seen whether the market will give Great Wall enough time to do that.
The average capacity utilization stands at 58 percent, which means Great Wall must increase the number of profitable vehicles sold soon if it doesn’t want to run out of cash. Being stuck in the lower ranks also means making less money on every car, which leads to less financial firepower to develop more expensive vehicles that can be more profitable. It’s a long struggle that always takes decades.
After the private companies, the largest Chinese passenger carmakers are state-owned enterprises like FAW, Chery and Chang’an, with appalling capacity utilizations of 28 percent, 29 percent and 34 percent, respectively. Both FAW and Chery seem to be incompetent at making vehicles with any other attraction than price. These two carmakers represent two different failed plans for building up significant Chinese carmakers.
FAW stands for a growth approach, based on the assumption that foreign carmakers are willing to share technology know-how with their Chinese partners. Thirty years after the introduction of the joint-venture model, the Chinese partners are still not even close to becoming competitive carmakers. The large state-owned companies like SAIC, FAW and Chang’an all have very profitable joint ventures. It’s only rational that the management of these SOEs is not trying hard enough to become better carmakers on their own terms as long as there is a reliable income stream from the joint ventures.
Chery stands for the approach of throwing tons of money at a company and hoping for the best. Over the years, Chery has become less competitive. One problem was that Chery was unable to absorb the knowledge of international executives.
‘Third idea’
Chery’s Qoros joint venture with Israel Corp actually represents the third idea of developing a successful carmaker. This time the money is thrown at a team of international executives, who are to build a team that would include many Chinese employees as well. Its first car managed to get the highest rating in the Euro-NCAP and seems to be on par with any European car in that price range. Qoros is trying to build the brand and hasn’t taken shortcuts in terms of quality. However, this approach means that Qoros will take many years before high numbers of cars will be built. It has to make sure the shareholders don’t lose their patience on the way.
Geely is an example of a fourth approach. Rather than trying to just grow organically, Geely bought Volvo to get access to know-how. Geely will struggle to get Volvo in a position where it can be sustainably profitable. Three different local governments supported the acquisition, which explains why there will be two small car plants 3,000 kilometers apart with an engine plant in between, rather than all combined into one larger facility.
Export is also not a solution for the Chinese carmakers as long as the original equipment manufacturers are not ready for sophisticated markets like Western Europe or the US. The last major original equipment manufacturer to join the global ranks of sophistication was Hyundai. However, from the first Hyundai Pony in 1975, it took almost 30 years for the automaker to be taken seriously in the US and Europe. Hyundai managed to become a successful exporter only after it secured a dominant market share in its home market South Korea. None of the Chinese original equipment manufacturers has what it takes to secure a large market share at home.
If China manages to rebalance the economy, less money will end up in the hands of local governments. Since land sales also will be curbed in future, local governments will have to find new income sources. Selling shares in joint ventures would be significant. Local governments will be more than willing to support the end of the joint-venture rule. We assume that the buy-out of the Chinese partners would happen over 10 years or so. In that time, the governments can either decide to exit the car market or invest significantly, maybe by acquiring a foreign carmaker.
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