Unlike Japan and the US, the world's two largest auto manufacturers which have seen their own car brands widely accepted at home and abroad, China still sees its automobile market dominated by foreign brands including Volkswagen, GM and Honda, though most of them are produced by their joint ventures (JVs) with local businesses.


It took China 20 years to transform itself from a land of bicycles to a huge automobile market. China's auto market has maintained a 20% to 30% annual growth rate for the past four years. With its output and sales topping 8.8 million and 8.79 million respectively last year, many media forecast that the sales figure would likely cross the 10-million mark this year if the growth rate is not lower than 14%.

Therefore, China would become the second country in the world whose auto sales exceed 10 million after the United States.

The numbers may be dizzying, yet it is still only half-true to say that China is a car manufacturing giant in its own right. Actually it is not Chinese companies but those foreign JVs that have manufactured most of the passenger cars in the country during the past few years. In other words, most of the cars made in China are actually not made by China.

Chery and Geely, which are regarded as the national pride for homegrown cars, were the only two wholly Chinese-owned automakers on the list of the top 10 passenger carmakers in terms of sales in China since 2005.

However, their rankings have been lowered to the seventh and 10th in July 2008 from fourth and ninth at the end 2007 [see chart].

Meanwhile, the market share of domestic car brands has also seen a significant drop since late 2007 after hitting a record high of 30.6% at the beginning of 2007.

But by December 2007, the domestic brands only took up 18.62%, a record low in the past few years.

Although the share rebounded to around 24% in the first half of 2008, we may not be overly optimistic about the situation.

The continuously rising raw material costs and oil prices have certainly added to the challenges of the Chinese auto market. However, the increasing incomes of urban households and falling prices of all types of vehicles resulting from price competition among the auto manufacturers in the country have jointly caused the shrinking of the low-end car market, the stronghold of Chinese automakers like Chery and Geely.

According to statistics from the China Association of Automobile Manufacdhturers, sales of cars with emissions lower than one litre saw slow growth in the first half of this year to 410,800, a slight increase of 0.17% year on year, while SUV sales volume, by contrast, increased by 42% to 224,400 units over the same period last year. It is easily seen that the competition has been gradually moved to the middle- and high-end segments, which most domestic automakers are not ready to touch yet.

Moreover, the development of Chinese automakers has stagnated, in terms of financial strengths, R&D capabilities, production scales, as well as branding and marketing strategies.

Though domestic automakers are also seeking overseas expansion, the progress is much slower than their foreign counterparts' massive foray into China. It can be estimated that in a short period of time, these Chinese automakers are unable to go head-to-head with those foreign big names in international markets in an all-round way.

However, it is notable that the Chinese auto manufacturers, unlike seven years ago when they first joined the auto industry without much government's blessing, are now expected to enjoy more favourable policies, as the Chinese government has realised that the country needs more independent innovation and brand building, two factors that are crucial for Chinese companies to compete with those well-established MNCs in the future.

China's auto market is transforming itself into a highly competitive one from a purely lucrative one, which may temporarily bring trouble to the local automakers.

However, this may not necessarily be a bad omen. The recent sales tax cut on small cars, though the direct economic benefit is minimal, is a positive signal from the central government and helped boost the confidence of Chinese automakers.

Foreign auto giants may not think Chinese brands would pose any serious threat to them. However, the great potential of the Chinese carmakers such as Chery and Geely cannot be underestimated. It is the opportune time for the Chinese players to brace for more upcoming challenges and grab a bigger share in the global market.

The contributor is the Research Director and Managing Consultant with China Knowledge Consulting. The firm provides corporate services, financial advisory, marketing strategy and recruitment to foreign businesses seeking business opportunities in China. Opinions expressed are her own.