After five years of a transitional period, China will fully open its auto market. By 2022, will Chinese auto brands become strong enough?
On April 17, the Chinese government announced that it will scrap all foreign ownership limits for companies producing automobiles in China over the next five years. To be more precise, it will lift foreign ownership stake limit in manufacturers of special purpose vehicles and new energy vehicles in 2018; in makers of commercial vehicles in 2020 and in makers of passenger vehicles in 2022.
To summarize, all foreign ownership caps for China’s automobile industry will be completely removed within five years.
Initially, when foreign auto brands entered the Chinese market, they had to find a local Chinese auto company to set up a joint venture to build cars in China. They were not allowed to own more than 50% of these joint ventures.
They couldn’t form more than two joint-ventures with as many Chinese partners in the same automobile category either. (For example, Volkswagen, which formed passenger vehicle joint ventures with FAW (First Automotive Works) and SAIC (Shanghai Automotive Industry Corp), was not allowed to partner with a third Chinese partner to produce passenger cars.
How will this gradual but thorough open-up policy affect the Chinese market, which is the world’s largest? To be more precise, where will Chinese brands be five years from now?
First of all, the better ones of private Chinese auto brands are already strong enough to compete against foreign auto brands. In the recent five years, Chinese auto brands have significantly increased their market share in China. As a result, South Korean and French auto brands have been yielding market shares to them.
Now that these private brands have established a solid foothold in the lower-end market sector, they’re foraying into middle or even high-end sectors. For example, Great Wall has launched its WEY premium SUV brand and Geely partnered with Volvo to set up a joint venture LYCO & Co. to pilot a new shared smart car business model.
Secondly, we have to admit that Chinese partners have made meaningful contributions to the successes of foreign brands in China. Not all globally successful brands are automatically success in China. For example, Toyota is a global leader, but in China, it is lagging behind Volkswagen.
Apart from the ups and downs in diplomatic relationships between China and Japan, VW owes much of its success in China to its excellent domestic partners – SAIC and FAW. It is a similar story for Nissan and GM in China. To win the Chinese market, you need more than technology and manufacturing. Chinese partners can help make a big difference, especially in sales network and marketing.
Thirdly, for state-owned Chinese auto companies, they have also made big progress on developing their self-owned brands, such as FAW, SAIC, Changan, and Dong Feng. Their brands have already moved up in the best-selling model ranking in recent years and laid a solid foundation for branding and manufacturing.
Last but not least, let’s fast-forward to five years in the future. What will the Chinese market of 2022 look like? Given the trajectory, it’s safe to say that the power of Chinese auto brands and the quality of their cars will continue to rise.
At the same time, new energy vehicles will become more mainstream in China, which is a totally different realm compared with the fossil-based auto market. The Chinese government supports Chinese auto brands can boost their strength through becoming leaders in the new energy sector. As a matter of fact, some Chinese brands have already accumulated sizable advantage in this area, such as CATL and BYD’s leading position in the auto battery.
The recent five to 10 years is the story of the growth of Chinese auto brands. They have narrowed gaps with foreign brands in many areas, from product quality to branding to sales channels. In some areas, they’re even doing a better job than foreign competitors now. This is one of the main reasons for slow-down of foreign auto brands’ growth in China. For French brands, they have even reported declines in sales.
In the near future, this trend will continue, but more important game-changers will come from new-energy cars, connectivity, and AI. Chinese auto brands have a good foundation to compete with foreign brands in these areas. For example, the leading Chinese Internet companies, Baidu, Alibaba, and Tencent, are all entering this area with their mighty technology power and huge data resources. In theory, they should feel easier to work with Chinese auto brands.
To summarize, in the five-year transitional period, Chinese auto brands have a good chance to weather the challenges brought by full open-up of the industry. We can expect a smooth and gradual change of the market competitive landscape in China.
The article was originally published on Kantar.com