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New Study From IBM and University of Michigan Explores China’s Automotive Industry Future


Study Finds Development Challenges Growing as Automotive Industry Expands

ARMONK, NY and ANN ARBOR, MI -- Nov 30, 2005 -- A new study released today by IBM and the University of Michigan Transportation Research Institute’s Office for the Study of Automotive Transportation (OSAT) reveals the Chinese automotive industry is facing a number of significant challenges as it continues its expansion. The need to adapt to a market economy, a lack of technology and knowledge transfer from joint ventures, and infrastructure, air quality, and oil supply challenges all combine to create an uncertain future for the Chinese automotive industry, according to the study.

The results from “Inside China: The Chinese View Their Automotive Future” were part of extensive research which gathered the opinions of leaders from the Chinese automotive and government industries, complemented by views from academic experts. The study was designed to deliver a unique insider’s view from Chinese experts on the potential challenges their industry will face. The full study is available at IBM’s website for download.

The Chinese automotive industry has grown dramatically over the past decade. According to the National Bureau of Statistics of China, in 1993 a mere 220,000 cars were produced in China. By 2004 that number jumped to 2.34 million units produced. Fueling this production growth has been a rise in regional demand throughout Asia. Within China the number of new car registrations is expected to grow steadily rather than exponentially over the next 10 years.

The Inside China study participants revealed that an improvement in sales and service infrastructure is needed to facilitate the anticipated growth. One of the major issues is uncertainty around vehicle financing policies. The Chinese government restricted the number of auto loans in 2003 due to a huge series of defaults. There has been some movement with new policies allowing a number of manufacturers to create their own financing units.

One unexpected area of growth that touches the sales infrastructure is the burgeoning used car market in China. The current resale model in China requires a dealership to facilitate the transaction. Yet, there are still considerable requirements to completing used vehicle sales. Several of the study’s experts agreed that a well-regulated used car marketplace could lead to a growth opportunity for manufacturers.

Another area of focus in China is building a quality car dealership network that not only sells cars but becomes a reliable source of service for car owners. Currently, customer satisfaction at dealership locations varies significantly. The interviewees agreed that since China is such a new marketplace all players have an opportunity to leverage the dealership experience to create lasting relationships with customers.

“Many vehicle manufacturers are coming to China with a clean slate,” said Bruce M. Belzowski, Assistant Research Scientist at OSAT. “Working with the Chinese government, they have an opportunity to create an environment that will take all the lessons they learned in their home markets and apply them to a brand new model. The companies that are able to execute these new models and get a keen understanding of the Chinese consumer are in a better position to retain a customer for life.”

With this dramatic growth taking place, the Inside China study found government strategies attempting to manage the transition to a market economy. For example, a Chinese company wanting to produce vehicles in China may not form a partnership with a foreign company if the foreign company will own more than 50 percent in this venture. In part, these restrictions were put in place to also facilitate the growth of Chinese research, development and manufacturing knowledge for future domestic automotive companies.

According to the Inside China study, joint ventures, in different degrees, have not transferred the technology and knowledge to their Chinese partners that the government expected. “There is still some fear and differing views on business relationships between foreign and domestic partners in the Chinese automotive industry,” said Linda Ban, Global Industrial Sector Leader, IBM Institute for Business Value. “Joint venture partners are concerned their Chinese partners will use any knowledge they transfer to compete with them in the future so they are being cautious. Thus, the skills and experience in manufacturing, design, testing and distribution haven’t developed as fast as Chinese officials expected. Most of the interviewees expect it will now take two decades for Chinese manufacturers and suppliers to close the product and process gaps with their world-class counterparts.”

The Chinese recognize the need to expedite their product and process knowledge attainment and are moving to fill the gap through a number of strategies. The study predicts an increase in merger and acquisition activity, inside and outside of China, over the next 10 years aimed at acquiring technology and streamlining processes. A change in relationship terms is also expected with the idea of joint ventures being replaced with cooperative development deals where both partners invest in development of new brands and cars.

Foreign engineering services firms should also expect a boom in business, according the study. With some Chinese manufacturers racing to develop new engineering and design processes, many are outsourcing the work to engineering firms that offer expertise in key areas and have no competing products. One other area the Chinese are exploring is the increased use of components and technology available from global, tier-one suppliers.

The Inside China study also identified the country’s infrastructure, air quality, and oil supply as possible inhibitors to growth of the domestic automotive market. According to the National Bureau of Statistics of China, in 2004 China’s civil vehicle population reached 26.9 million increasing fourfold from 1990’s 5.5 million.

With such large vehicle growth in major cities, traffic congestion has become a fact of life. Some efforts to build elevated roadways and public transportation systems have begun in Beijing and Shanghai to reduce congestion, but there is still a parking shortage. According to China Today, currently Beijing has 2.4 million registered vehicles but can only provide parking spaces for 600,000 of them. Interviewees believe the parking shortage could also be a barrier to future auto development. They see a need for the government to focus on traffic management that integrates traffic planning, road construction, traffic-flow control, and congestion management.

In terms of air quality, the Chinese see the rise in the number of vehicles becoming the major contributor to poor air quality in their major cities. Though the government is trying to accelerate vehicle emission standards, interviewees report barriers such as high sulfur content in oil, low-quality fuel, changing standards, poor enforcement, and increased vehicle costs due to higher emission standards may keep China from reaching their desired air quality goals.

The study participants also consider manufacturers as the leaders in conducting the research and development on advanced clean technologies such as hybrids, fuel cells, and other alternative fuels. These clean technologies will also play an important role in the future Chinese automotive industry because of future oil supply challenges China (and the rest of the world) faces in the future.

Forty percent of China’s oil was imported in 2004, making it the third largest importer of oil. In the future, vehicles are expected to account for 57 percent of China’s total petroleum consumption, and China’s total import dependency is projected to grow to 75 percent by 2030. “But China’s increasing dependence on oil may be unavoidable in the near future,” said Jimin Zhao, Research Investigator at the University of Michigan’s School of Natural Resources. “The incentives to reduce oil consumption are not in place today: low fuel prices do not provide enough incentive to conserve, fuel-efficient and small engines in vehicles are not encouraged, and alternative fuel vehicles are more expensive. There is a need for regulations and economic policies to promote fuel efficiency.”

About OSAT
OSAT is a unit of the University of Michigan Transportation Research Institute (UMTRI), which describes and analyzes the automotive industry’s current developments and future directions. Its overall objectives are to provide research and analysis, information resources, and communication forums that meet the evolving needs of the international automotive and related industries. In addition, OSAT serves as an interface and resource for industry stakeholders, including manufacturers, suppliers, retailers, labor, scholars, government, the media, and the general public.

About the IBM Institute for Business Value
The IBM Institute for Business Value develops fact-based strategic insights for senior business executives around critical industry-specific and cross-industry issues. The Institute, which is part of IBM Business Consulting Services, draws on IBM consultants around the world to identify issues of global interest and to develop practical recommendations with local relevance. With consultants and professional staff in more than 160 countries, IBM Business Consulting Services is the world’s largest consulting services organization. This paper is part of an ongoing commitment by IBM Business Consulting Services to provide forward-looking industry and business points of view, and to help companies and industries transform their futures. For more information, visit


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