China and autos decentralization and competition in an exploding market
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China and autos decentralization and competition in an exploding market l.jpg

Note that I skipped many slides in my class presentation. Feel free to ask followup questions at:

[email protected]

If you are not using a W&L account, it could get trapped in the new spam filter -- I always acknowledge emails quickly, so if you don't hear from me, send it from another account!

China and Autosdecentralization and competition in an exploding market

Spring 2007, Shanghai

Washington & Lee University Study Abroad Trip


Two tasks l.jpg
Two tasks Feel free to ask followup questions at:

  • Teach you more about China

  • Prepare you to ask a real expert good questions (Alyssa Webb)

    (Maybe teach a little economics, too)


Projections june 2004 l.jpg
Projections, June 2004 Feel free to ask followup questions at:

PwC Autofacts


Reality 2006 surpassed 2011 projections l.jpg
Reality, 2006 surpassed 2011 projections Feel free to ask followup questions at:


Slide5 l.jpg

US Feel free to ask followup questions at:

China

Japan

India

Mexico

Korea

Russia

Germany

Brazil

France

UK

Italy


Political economy industrial organization l.jpg
Political economy + Industrial Organization Feel free to ask followup questions at:

  • Early auto industry: ford's position

    • Monopoly!

  • Then GM, Chrysler

    • Oligopoly

  • Now Toyota, Honda, Nissan

    • And imports, all with multiple models

  • Monopolistic competition

    • Zero (economic) profits, excess capacity, high distribution costs (advertising, inventory)

    • Choice is costly…


So how about china l.jpg
So how about China? Feel free to ask followup questions at:

  • What do you see on the road in Shanghai?

    • When you got into a taxi, what make was it?

  • A VW Santana, right?

  • So how many car producers under Mao?

    • Initial single Soviet plant in Manchuria ca. 1958

  • But then decentralization

    • Entering modern period =

      • 119 firms!

  • Each part of a local monopoly


Excess entry l.jpg
Excess entry Feel free to ask followup questions at:

  • Initially one Soviet plant in Manchuria

    • Based on a Fiat plant

    • But also regional military plants from late 1940s

  • But extreme decentralization under Mao

    • "3rd Front" policy put production in remote areas in case Russia invaded

  • Party rewarded output

    • Industry counted (but not quality!)

      • services didn't

      • agriculture was grain first


All 30 odd provinces had plants l.jpg
All 30-odd provinces had plants Feel free to ask followup questions at:

  • Trucks of course were primary

    • But also cars

    • Motorcycles, motorbikes

    • Various tractor-like 2-, 3- and 4-wheelers

  • How was that possible

    • Look at Shanghai's roads:

      • VW Santana still large share

    • Look at Beijing's roads

      • Even though it is the #1 vehicle in China

      • You'll see almost no VW Santanas!


Political success from output l.jpg
Political Success from output Feel free to ask followup questions at:

  • Not efficiency!

  • Local protectionism

    • Huge employment levels in the aggregate

      • By that measure, China is #1 in world

  • Productivity began improving in the 1990s

    • But still pressure to buy local

      • And military / government demand too

    • Plus not (yet) at international efficiency levels

    • Big jump since 2000

  • Economies of scale -- more later


So how many firms now l.jpg
So how many firms now? Feel free to ask followup questions at:

  • No good count! But … in all likelihood more!

    • So 120+ firms

  • Why no exit?

    • Growth allows all to survive

      • For now…! With help by local governments and banks

    • Compare that to the US market entering WWI, smaller than China's market yet dozens of firms

    • Role of suppliers: assemblers, well, assemble!

      • And market

      • And (sometimes!) design

  • Contrary to central government policy!

    • Which has long and unsuccessfully pushed consolidation


However l.jpg
However… Feel free to ask followup questions at:

  • A few success stories developing

    • VW but lots of Buicks in Shanghai

    • Guangdong significantly richer

      • Honda and Nissan and now Toyota

    • 4 domestics stand out

      • Chery, Brilliance, Geely, SAIC

  • Three delta regions (my sense)

    • Pearl River (south), Yangtze (mid), Yellow (north)

    • Sichuan as a potential 4th region

      • But everyone else trying, Anhui doing well!


Market structure shifting l.jpg
Market structure shifting Feel free to ask followup questions at:

  • Trucks and luxury vehicles at start

    • Chauffeured vehicles

  • Now mid-sized a big share, plus minivans etc (especially corporate use)

  • New segment: compacts at $7000-$10,000

    • Still a luxury, but lots of rich Chinese

      • Sales are now greater so do China's middle/upper class families outnumber Japan's population!?

  • regional producers with small, cheap vehicles

    • Also inexpensive


Market remains fragmented l.jpg
Market remains fragmented Feel free to ask followup questions at:


Region x segment l.jpg
Region x segment Feel free to ask followup questions at:

  • Fragmented market! - only 2 firms have a double-digit share

  • 20 non-Chinese firms

  • 29 substantial Chinese firms

  • 49 firms total!

    • 14 have sales over 100,000 units

    • 6 have sales over 250,000

      • VW, GM, Honda, Chery, Hyundai, Toyota

    • 1 has sales over 500,000: VW

      exit, yes, but still new entry


Some adjustment already l.jpg
Some adjustment already Feel free to ask followup questions at:

  • No longer does everything sell

    • Obscene initial monopoly prices gone

    • Profit margins were 30%!!

      • Now prices down 20% for many models

  • VW as representative monopolist

    • No new models

    • Indifferent quality

    • Slow to respond when market changed

  • But in general capacity constraints

    • Which won't last forever


Sustainable l.jpg
Sustainable? Feel free to ask followup questions at:

  • Some exit over time

    • Some already … Fiat venture up for sale?

    • M&A strategy (maybe) to consolidate regionals?

  • 6.15 million units in 2006 and growing

    • US at 16-17 million still much larger

    • But Germany Japan France all smaller

  • Fragmentation!

    • New models at roughly 1 per week

      • But still less than US with 650 models?

    • Yet industry benefits from economies of scale

  • So a contradiction?


  • Many will survive l.jpg
    Many will survive Feel free to ask followup questions at:

    • Fierce competition, will be surprising successes

      • For now hard to fail, will have many producers

        • Compare to Big Six in US, plus Little Six, plus imports

      • Some will end up in bad niches / mismanage JVs

    • Much will hinge on government policy

      • Environment!

      • Auto industry an easy political target everywhere

    • Unique strategies echoing 1910s in US


    Assembly is not all l.jpg
    Assembly is not all Feel free to ask followup questions at:

    • Everwhere…

      • Parts employment at least 2x assembly

    • Assemblers assemble

      • Parts producers make

      • Parts producers engineer

      • Parts producers enjoy economies of scale

    • Outside China, Magna may adopt same

      • Looking to buy Chrysler!


    Parts production l.jpg
    Parts production Feel free to ask followup questions at:

    • Key to the industry

      • All the major players are here

        • 75 of top 100 global firms

        • 1,200 foreign and joint-venture plants total!

          • Can have 100% subsidiaries, unlike assembly

      • Delphi has 500+ engineers

        • More than some car assemblers!

  • Experience & capacity growing rapidly


  • Industrial geography l.jpg
    Industrial geography Feel free to ask followup questions at:

    • Asia needs parts producing capacity

      • Duh, Chinese market up 20+% in Q1 of 2007

        • India, ASEAN (Assoc Southeast Asian Nations) growing too

        • You have to add capacity somewhere!

    • Implicit rule of thumb:

      • Assemble where you sell, make parts nearby

      • But a long transition to accomplish that!

  • China not low cost for labor intensive parts!

    • Nor is it always low cost against existing plants

  • But it beats a new plant in Japan or Korea!

    • Not to mention Germany and


  • Other ancillary industries l.jpg
    Other ancillary industries Feel free to ask followup questions at:

    • In aggregate 3x manufacturing

      • Repairs and service

        • A big segment

          • old & poor quality vehicles

          • Hard use on rough roads

          • NO info … but maybe you can find some?

          • Yellow Hat of Japan seeking to enter?

      • Dealers

        • Largely ignorant about those in China

          • But will meet Infiniti people

          • Lots of consultants, professional marketing

        • Dealerships can be a real estate play, too


    Policies l.jpg
    Policies Feel free to ask followup questions at:

    • Lots of imports at different points in time (Kia!), but now small share of market (250,000)

    • Strong pressure for joint ventures

      • Constant tensions

        • Some Chinese firms have multiple subsidiaries

          • More than one foreign partner

          • Ambitions to launch vehicles on their own

    • Barriers (perceived & real) encouraged entry

      Probably too successful for own good


    Autos and energy l.jpg
    Autos and Energy Feel free to ask followup questions at:

    • Energy demand rising at +2.3% per year

      • Hence doubles in 30 years ["rule of 72"]

      • No growth 1996-2000

    • Why so low?

      • After all, GDP growth is huge!

        • 7%-11% implies economy doubles in

          • ≈ 10 years at 7%

          • < 7 years at 11%

      • Old rule of thumb: elasticity ≥1.0 ["elasticity"=?]


    Nature of energy demand l.jpg
    Nature of energy demand Feel free to ask followup questions at:

    • Less heavy industry

      • New firms use higher quality energy sources

    • Less crude sources by households & others

    • More urban

      • more energy efficient than rural

      • But (duh!) more autos

    • So weight of petroleum up

      • China now a net importer

        • 1979 exports ==> big push development strategy failed

        • Cf. perestroika in USSR … parallels & contrasts


    Why poor link l.jpg
    Why poor link? Feel free to ask followup questions at:

    • Legacy of planned economy

      • Prices are administered

      • Starting efficiency levels abysmal

        • 80% poor quality coal in 1980

          • Still 56%

        • Electricity, petroleum

          • 13% and 24% respectively


    Now transition over l.jpg
    Now transition over? Feel free to ask followup questions at:

    • Initial economic reforms (as in USSR) premised on energy exports

      • Petroleum and coal

        • Former never panned out, now latter nil

    • So net importer

      • Petroleum up 15% to 20% pa

      • Small share of world total at 3.5%

        • But with low growth elsewhere, large share of incremental demand


    How will change l.jpg
    How will change? Feel free to ask followup questions at:

    • Better quality coal

      • will be source for electricity

    • Motor vehicles petroleum for next 2 decades

      • Electric vehicles in urban, low-distance areas

        • Fits China?!

      • Hydrogen a long ways away?

        • But no existing gasoline infrastructure so sensible?

        • Government policies can push easier than in US / EU

      • Hybrids not viable

        • Silly to put 2 power plants and battery in a small vehicle


    Autos and pollution l.jpg
    Autos and Pollution Feel free to ask followup questions at:

    • 16 of world's 20 most polluted cities

      • SO2, NO2 , CO, ozone, PM (particulate matter)

        • In a short breath, smog

      • Est. 590,000 excess deaths a year!

    • Tianjin health impact 3.7% GDP (US$1.1bil)

      • Even though pollution cut by 10+%

    • Source 50-80% from motor vehicles

      • Additional congestion time losses

    • Only recent switch to unleaded fuel

      • Additional hidden costs from brain damage


    Energy sum l.jpg
    Energy: sum Feel free to ask followup questions at:

    • Motor vehicles will account for about

      • 60% of demand in 2020

      • Improving efficiency even 1% has impact!

      • Easy political target


    Big push for electric cars l.jpg
    Big push for electric cars Feel free to ask followup questions at:

    • Good for within-city transport

    • Uses night-time generating capacity

      • Peak load is daytime

      • So electricity providers have huge strategic & management challenge that this helps

    • Technically feasible in short-run

    • But government also favors hybrids

      • Maybe irrationally so


    Is it good policy l.jpg
    Is it good policy? Feel free to ask followup questions at:

    • Maybe … shifts location of emissions away from urban areas

      • Key for smog, as in LA (electric plants downwind in NV)

      • Maybe not be lower overall emissions

        • depending on details

    • Electricity can potentially be cleaner

      • May not save energy or cut CO2

      • Lots of waste across entire electricity chain

      • But electric engines pretty efficient

  • Batteries an issue; government can mandate


  • Political salience l.jpg
    Political salience Feel free to ask followup questions at:

    • Consumers "understand" cars

      • Not technical electric power grid issues

    • Few producers so administratively easy

      • Though China stretches the definition of "few" more than anyone!

    • Also licenses etc etc make policy easier to implement

      • Autos are a sexy industry

      • Sex is OK in politics

      • but fouls up decision making (a polite 4-letter "f" word)


    Lessons 1 of 2 l.jpg
    Lessons? Feel free to ask followup questions at: 1 of 2

    • Legacy of extreme decentralization

      • Interesting strategy issues

    • Entry game with lots of players

      • long-run reality of monopolistic competition

      • Until then, really profitable

        - for some

    • Extreme competition

      • Survivors may have unusual skills and strategies

        • 35% of GM's advertising is for internet chat rooms


    Lessons 2 of 2 l.jpg
    Lessons? Feel free to ask followup questions at: 2 of 2

    • Political economy

      • Auto industry everywhere politicized

      • At least in post-WWII era

    • Lots of externalities but

    • Direct auto policies not always best

      • Biggest sector (parts!) escapes attention

        • Sheer diversity makes regulation hard


    Conclusion l.jpg
    Conclusion Feel free to ask followup questions at:

    • Transport as a positive externality

      • Without transport, markets can't function

      • Motor vehicles offer flexibility trains don't

    • Without transport, poverty

      • Poor rural residents vastly outnumber urban poor

    • Transport is ONE element of development

      • A necessary(but not sufficient) component

    • Assignment

      • judge the infrastructure you encounter

        • Vehicles (making selling servicing) isn't the issue!


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