by Mark Mobius, Franklin Templeton Investments
The picture postcard image many Western travelers may have of China’s city streets is one besieged with bicycles and empty of cars, but China is no longer pedaling its way into the future—it’s firmly in the driver’s seat as autos rapidly replace human-powered transit. Motor vehicle sales have been booming in China, a reflection of the growing middle class. In 2009, car sales (by volume) in China exceeded those in the United States, and in 2011, China led world auto production at 18.4 million units.1 Consumer demand continues to power sales of both domestic and foreign brands in China. In May 2012, vehicle sales in China surpassed 1.6 million units, rising 16% on a year-over-year basis, compared with just over 1.3 million units sold in the U.S.2 While overall growth may have been slowing in China this year, solid sales of durables like cars provide evidence its consumers remain a powerful global economic force.
Historical Perspective
The roots of China’s auto industry predate the 1950s, but market reforms in China in the late 1970s, 80s and 90s associated with Communist Party Chairman Deng Xiaoping unleashed a strong pent-up demand for car ownership.3 Passenger car production was rather anemic during those decades, but China’s entry into the World Trade Organization in 2001, along with domestic reform efforts, helped pave the way for acceleration in the Chinese car market during the past decade.
When I first visited China 20 years ago, I could cycle all over the cities along with millions of others. As consumers started to move behind the wheel, bicycle use dropped. Some large cities (like Beijing) became so choked with car congestion that the government had to impose permit quotas for new registrations. Even with the supply of new autos limited on city streets, I see no signs of slowing demand for cars in both the cities and the rural areas. This growth could have implications for the long-term price of oil and other fuels needed to power all these vehicles, too.
At present, foreign companies still dominate the Chinese auto market. European and U.S. brands lead, followed closely by Japanese and Korean automakers. The attractiveness of the Chinese market and desire to save on foreign exchange costs led to the establishment of domestic car plants in China. Limits on foreign ownership had prevented overseas manufacturers from setting up wholly-owned plants, so they proceeded via joint ventures with state-owned firms or Chinese entrepreneurs. Overseas car firms often formed ventures with several different local businesses and the joint ventures—both then and now—produce a combination of global brands under license as well as domestic brands.
In the luxury market, major European and U.S. companies continue to dominate for the time being, and are investing heavily in state-of-the-art production facilities in China. Ultra-luxury cars are still imported, and China is becoming an increasingly important market for such vehicles, as evidenced by the western luxury brands that have revealed dramatic sales increases in China over the past few years. One European automaker has reported that approximately 25% of its worldwide profits now come from China, and in recent months, has sold more cars in China than in the U.S.
Auto Production in China: Quality, Quality…and Quality!
On a recent visit to a European automaker’s manufacturing facility in China, there were three things that impressed me when I observed production there. First: the cleanliness. Second: the emphasis on quality control. It seems that as much time and effort was spent on quality-control as on actual production. Third: the ease at which the workers on the assembly line did their tasks. Careful production planning was evident; each production step was designed to make the worker’s job easier. I noticed a lot of robotic tools and easily accessible parts. The degree of automation was impressive and the emphasis was on quality, quality and more quality!
Local Chinese brands, however, are gaining market share, and I observed a dozen or so with interest. The largest producer of sports utility vehicles in China, for example, is a local brand which also exports to more than 60 countries. I was able to visit one of the company’s new plants in China, where it is expanding production at a rapid pace.
Electric and hybrid vehicle production is ramping up in China, and one of the most interesting domestic auto companies I toured was engaged in the production of electric vehicles. When visiting the factory, I was given the opportunity to drive one of their cars. I was shocked by the acceleration; the car leapt at a soft press on the pedal. And, being electric, there was no motor noise, which took some getting used to.
There is evidence that the Chinese government would like the share of local brands in the market to rise. In 2012, the government published a list of approved vehicles available for purchase by government organizations that contained only local producers.4 And, according to state media reports, the Chinese government is considering a revival of subsidies to buyers of smaller vehicles in rural areas, which could help further fuel domestic sales.
In recent days, we’ve even seen some domestic Chinese automakers acquiring foreign brands, and I expect that trend could continue as weakness in the Eurozone could unearth some bargains for Asian automakers on the hunt for acquisitions. The expansion of Chinese car brands into foreign markets hasn’t made much of a splash yet, but over time I see potential for China to emerge as a key player in the smaller, more affordable car market.
Relative to the size of its population, auto ownership in China is still in its infancy and has much room to grow. With China’s weight in global car markets likely to increase in the decades to come, it’s certainly an exciting time for the auto industry in China.
1. Source: Organisation Internationale des Constructeurs d’Automobiles, March 2012.
2.Sources: Bloomberg; National Automobile Dealers Association, May 2012; Ward’s Auto.
3. Source: Federal Reserve Bank of Australia, “The Emergence of the Chinese Automobile Sector,” March 2011.
4. Source: China Car Times, February 27, 2012, Ministry of Information and Technology
Copyright © Franklin Templeton Investments
