Domestic Chinese Auto Makers’ Ranks Face Thinning

As the rate of growth drops in China’s turbulent automotive market, domestic brands are losing some of their punch and promise.

A new LMC Automotive study shows the number of Chinese intending to purchase a new local brand has fallen from 26% in 2009 to 20% this year.  

“Although local OEMS have kept releasing new products, more and more car buyers are voting with their feet as they find most of these new models are in fact facelifts or copies of other popular models,” says Marvin Zhu, an industry analyst with LMC Automotive in Shanghai.

“Meanwhile, the (foreign) joint ventures are offering cars of similar size with increasingly competitive prices.”

The domestic makes’ declining appeal reflects Chinese consumers becoming more knowledgeable and more attracted to the superior quality and reliability of both the global brands and models offered by foreign auto makers in their obligatory joint ventures with Chinese partners.

Another recent LMC Automotive study reports the initial quality of Chinese domestic brands declined this year, while the gap between domestic and international brands widened.

“The most commonly reported issues by owners of Chinese domestic brands involve putting manual transmissions in gear.  Other problems that manufacturers need to work on are the engine losing power when the air conditioning is turned on and excessive fuel consumption,” says Chris Chen, automotive research manager.

The playing field is not level in China, where about 75 light-vehicle manufacturers are scrambling for customers in a market dominated by several large automotive groups.  

All domestic auto makers get government help of one kind or another. But the major players get much more financial backing and support than their indigenous competitors, as well as juicy profits from their JVs with foreign companies.

“The local OEMs can do nothing but cry helplessly for government support,” Zhu says. “Think subsidies. They know they are unable to roll out competitive cars because they lack innovation.”

This year, for example, after Beijing limited the number of models qualifying for the RMB3,000 ($471) subsidy to buyers of fuel-efficient cars from 427 to 49, domestic auto makers suffered the most.

The technological lag is not limited to domestic producers.

Zhu notes 18 major Chinese automotive groups held nearly 20,000 patents as of 2010, with 70% of these belonging to BYD, SAIC and Chang’an Group, and almost 80% related to manufacturing and exterior design.

But 75% of the 24,000 patents owned by 14 major global auto makers such as Honda, Toyota, General Motors and Nissan represent core technology.

“This gap in the quantity and quality of patents indicates the Chinese firms’ weakness in (research and development) and innovation,” he says. 

In 2010, spending on R&D by Volkswagen, GM and Honda was more than 5% of their sales revenue while other global producers such as Ford, Toyota and PSA Peugeot Citroen spent more than 4%.

In comparison, R&D spending by China’s independent auto makers was 2% to 3% of sales revenues, while major groups such as SAIC, Dongfeng, Chang’an and FAW Group only spent between 0.5% and 2.5%.

Zhu reports the foreign JVs in China are spending billions of dollars on technology transfer to produce vehicles locally.

“Heavy reliance on foreign technology and weak R&D capability among local OEMs is preventing China from building a strong automotive industry. China is the world’s largest automotive market, but it still remains a ‘factory’ for global car makers,” he concludes.

As the market matures, the glory days of dramatic annual growth in domestic car sales may have ended, perhaps permanently. The increase is expected to be about 5% to 6% this year and range between 3% and 10% in 2012, compared with a jump of 33% in 2010 to 17.2 million units. 

LMC estimates light-vehicle sales in China will be 17,768,000 units this year, rising to 25,593,000 in 2020.

With winners and losers still being sorted out, there is fresh conjecture that the time may be right for more consolidation of China’s automotive industry.

“I don’t think all the local brands should be hanging in there forever,” says Xu Changming, general director of the Information Resource unit of the State Information Center.

“There are some 30 or 40 independent car brands now. It will be pretty good to have four or five left eventually. The stronger ones survive and the weaker ones fade away. That’s what happens in a market economy.”

However, the national brands are not expected to fade away anytime soon, even though earlier projections of a 40% share of the domestic car market by 2020 may have been overstated.

LMC estimates Chinese brands’ share of passenger-vehicle sales will be 30% this year, compared with 32% in 2010 and 30% in 2009, and will stabilize between 33% and 34% in the 2015-2020 period.