China: the World’s Largest Automobile Market
China has now overtaken the United States as the world’s largest automobile market. As you would know, this did not happen overnight and was in the making for the past several decades. Through this paper, I try to outline the automobile industry in China, track its growth over the last couple of decades and identify factors which led to China’s automobile industry getting to where it is now.
In the last 20 odd years, China has experienced exceptional growth which has reflected not only in the tenfold increase in the country’s GDP but also in the fast growing automobile market. As incomes in China have risen sharply, people’s interest in products that were previously out of their reach has also increased. Automobiles is one such segment. The history of the automobile industry can be grouped into 4 distinct phases: the central control and planning era of 1949–1979, the proliferation phase (1979–1994), the phase of concentration (1994–2004) and the most recent phase of explosive growth, since 2004.
- In the 1950s, the USSR provided assistance to China in setting up a project called First Automobile Works (FAW). The FAW formed a joint venture with Volkswagen to bring its cars to China.
- During the 1960s, relations between China and USSR deteriorated and Russia withdrew many experts from China. This forced China to focus on policies of self-development.
- The Automotive Development Policy of 1994 set ambitious local content and product development targets.
- Until China’s entry into the WTO in 2002, the country’s automobile market was plagued by high tariffs. Later, China created an easier environment for the entry of foreign automobile companies
After 2002, overall automobile production increased by 38.8 percent in 2003, and by 36.7 percent in 2004. This rapid growth attracted foreign direct investments which included investment from companies that already had a presence in China. In 2004, the government introduced a new auto policy (1) to promote the harmonious development of the automotive and associated industries; (2) to drive industrial structural adjustment; (3) to encourage self-reliant product development and local brand development, with a view to building up a few famous brands and globally competitive (top 500) automotive groups by 2010; (4) to encourage independent research and development and production on a large scale for key components and parts, and to foster the local suppliers and their international operations and (5) to promote light duty vehicles and new energy-efficient vehicles.
In the wake of slowing markets worldwide and a stagnant automotive market in the U.S., a massive 24.6 million units of vehicles were sold in China in 2015 (vs 17.2 million units in the U.S.), an impressive year-over-year increase of 4.7 percent. It is believed that a rising income among Chinese middle-class, a relatively low penetration rate (China’s ownership rate of 105 vehicles per 1,000 people is much lower than the global average of 140) combined with the government’s push for more urbanisation are key factors in the sustained growth the market is witnessing.
Of the total automotive sales, a majority 83 percent sales were in the form of passenger vehicles. The break up of sales in the passenger vehicle category are shown below.
It is forecasted that by 2020, automotive sales in China will hit 22 million units, potentially making China a larger market than North America and Western Europe combined. The key to automobile manufacturers’ success in China will be to understand changing consumer preferences and tailoring product offerings to appeal to them. The single biggest trend in the Chinese market now is a shift in demand toward sport utility vehicles (SUVs) and it is expected that sales of SUVs will triple by 2020 even though sedans would still remain the largest segment.
Tulane MBA Candidate, 2016