China’s Domestic Automakers Take a Hit, But Not All the News is Bad

Jacob George

After years of significant sales growth and business expansion, China’s domestic automakers have been on the receiving end of bad news in recent months. Some recent examples of stumbling blocks for China’s national automakers include:

• Year-to-date, the combined market share of China’s domestic automakers—which typically accounts for about one-third of annual passenger-vehicle sales—is down nearly 4%, in an overall market that is up 9%.

• In July, an influential automotive industry association predicted that more than half of China’s 48 domestic automotive brands (a majority have only been established in the last dozen years) would be discontinued in the next 3-5 years, principally due to foreign competition.

• In August, two of China’s leading domestic brands were forced to announce vehicle recalls in Australia (due to the affected vehicles containing the banned substance, asbestos). This recall prompted sober admissions of wrongdoing from the offending companies.

Certainly, these setbacks have been disappointing for a young industry racing to catch up with the world’s leading automakers. However, based on progress being made in other facets of the industry, there is still a major reason for optimism among China’s domestic brands. One area in which much progress has been made is initial vehicle quality.

Domestic Initial Quality Advances but Still Has a Long Way to Go

To be clear, there has been discernible progress in the initial quality of Chinese vehicles. However, this does not mean that the quality of China’s domestic vehicles is equivalent to its international rivals. In fact, according to consumer opinion collected by J.D. Power, China’s domestic automakers have a long way to go. As a group, China’s domestic brand vehicles continue to rank well below their foreign competitors’ vehicles from Japan, Europe, the U.S. and South Korea in results from the J.D. Power and Associates 2011 China Initial Quality Study (IQS).SM  What is more evident, even when taken on an individual basis, is that only a single domestic brand among China’s more than three-dozen automotive brands—Haifei*—ranks above industry average in initial quality.

That said, Chinese domestic brands continue to make improvements and are closing the gap with their international competitors in initial quality. For example, in 2000, Chinese domestic brands averaged 834 problems per 100 vehicles (8.34 problems per vehicle, or PPV) according to the IQS. By comparison, international brands sold in China averaged about half as many PPVs—438 problems per 100 vehicles (or 4.38 PPV) in 2000. This equates to 396 more problems per 100 vehicles (or 3.96 per vehicle) for Chinese domestic vehicles compared to their international competitors.

By 2011, IQS data shows the average PP100 for all Chinese domestic brands declined to 232 (or, 2.32 PPV), while the PP100 for international brands dropped to 131 (1.31 PPV). This leaves a gap of only 101 PP100, or just about 1 problem per vehicle more for Chinese domestics, down from nearly 4 problems per vehicle in 2000. Clearly, significant progress has been made. There’s even better news for Chinese automakers—at the rate that they have been making progress, regression analysis points to China’s domestic brands achieving parity with international brands by 2018, or even sooner.

New, Shared Technology Helps China’s Domestics

A second promising area for Chinese automakers is the acquisition—through purchase, sourcing or consulting agreements—of the newest production techniques and vehicle technology from their international partners. Based on the low ratings given by Chinese consumers to domestic vehicles in general, and the relatively minor engineering challenges that many of these problems present (such as the difficulty in shifting gears; a loss of engine power when the air conditioning unit is engaged; and the vehicle pulling abnormally to one side or the other), any small engineering improvements in areas mastered by global automakers make a greater distinction in the way Chinese consumers view their vehicles.

China’s moves to obtain state-of-the-art technologies, including acquiring the rights to whole automotive brands and their models—such as the purchases of the Volvo and Saab* brands—plus obtaining valuable engine, transmission, suspension, NVH (noise, vibration and harshness) and emissions technology—allow for Chinese automakers to achieve simple but vital improvements more quickly.

Since China’s leadership controls trillions of dollars in foreign reserves and several Chinese automakers already are counted among the world’s largest companies, we can expect that this trend to move ahead with technologies will advance at a fast pace, with continuing improvements to Chinese vehicles.

Exports Promise to Bolster China’s Auto Industry

Another area of promise for China’s automotive industry is vehicle exports. Exporting vehicles made in China—the bulk of which are Chinese-branded—reached 850,000 units in 2011, more than double the total of exports from the previous year. Through the first 6 months of 2012, exports reached 460,000 vehicles, a 22% increase over the same period in 2011 and on a pace to surpass 1 million units for the calendar year. That total would make China the third-largest vehicle exporter in Asia, just behind Japan and South Korea.

The main export destinations for Chinese-built vehicles are in countries of Africa, the Middle East, Eastern Europe, and South America, where low-priced Chinese vehicles allow first-time consumers who otherwise could not afford a new vehicle to buy one. In addition, selling vehicles abroad will give Chinese automakers necessary experience in organizing large-scale vehicle export programs before they decide to target some of the world’s largest, most mature and competitive export markets. If an industry’s ability to export is a good indicator of its global competitiveness, then China is making good progress.

Undoubtedly, China’s domestic automotive industry has experienced its own ups and downs recently. But not all the news is bad. Moreover, it’s possible that recent reversals and missteps might end up actually helping the industry in the long run, by inspiring companies to sharpen their focus to make them more competitive in the future.—Jacob George, vice president and general manager, global consulting at J.D. Power and Associates, Shanghai

Note: Tim Dunne, director of global automotive analysis at J.D. Power and Associates contributed to this post.

*Hafei, a brand of Harbin Hafei Automobile Industry Group Company, which merged with Changan Auto in 2010. One of its most known model is the Lobo supermini, a micro-car. 

 **Volvo is owned byChina’s Geely and Bloomberg News reported in mid-June that a Chinese-Japanese investment group agreed to buy Saab Automobile and convert the bankrupt Swedish manufacturer into a maker of electric cars. The first vehicle under the plan will be based on Saab’s 9-3 car and will go on sale early in 2014, withChinaas the main market.

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