Analysis of the Internationalisation Strategies of German Car Companies in China
Analyse der Internationalisierungsstrategien deutscher Automobilhersteller in der Volksrepublik China
Bachelor Thesis 2012 93 Pages
Table of Contents
LIST OF FIGURES
LIST OF ABBREVIATIONS
1 THE BIGGEST AUTOMOBILE MARKET OF THE WORLD
2 MARKET ANALYSIS OF THE CHINESE AUTOMOTIVE MARKET
2.1 Political-legal Factors
2.1.1 Political Circumstances for the Development of the Car Industry
2.1.2 China's Entry to the WTO
2.1.3 Involvement in the 12th Five-Year Plan
2.1.4 Legal Uncertainty
2.1.5 Management of Intellectual Property
2.2 Economic Factors
2.2.1 Economic Development
2.2.2 Automotive Market Situation
2.2.3 Automobile Suppliers
2.2.4 Automotive Financing Sector
2.3 Socio-cultural Factors
2.3.1 Distribution of Income and Disparities
2.3.2 Demographic Development
2.3.3 The Chinese Car Consumer
2.3.4 Marketing-Mix in the Chinese Automotive Sector
2.4 Technological Factors
2.4.1 Technological Trends - The Chinese E-Mobility Programme
2.4.2 Research & Development Landscape
2.4.3 Infrastructure and Traffic Management
3 INTERNATIONALISATION STRATEGIES
3.1 Timing Strategy
3.2 Establishing and Developing Business
3.2.2 Representative Office
3.2.4 Joint Venture
3.2.5 Wholly Foreign Owned Enterprises
3.3 Choice of Location and Partners
3.3.1 Locating Strategy
3.3.2 Finding a Business Partner
3.3.3 Chinese Automotive Companies
4 INTERNATIONALISATION STRATEGIES OF GERMAN CAR COMPANIES IN THE PEOPLE'S REPUBLIC OF CHINA
4.1 Volkswagen Group
4.1.1 Chronological Development of the China Strategy
4.1.2 Country-specific Market Development
4.2 Bavarian Motor Works Group
4.2.1 Chronological Development of the China Strategy
4.2.2 Country-specific Market Development
LIST OF ENCLOSURES
List of Figures
Figure 1: Production Volume of Passenger Cars and Commercial Vehicles
Figure 2: Sales Figures of Cars in the PRC
Figure 3: Foreign Automotive Companies in China
Figure 4: Import Duties on Passenger Cars
Figure 5: Feared Risks of Foreign Enterprises
Figure 6: Rare Earth Applications in a Hybrid Vehicle
Figure 7: Changes in the Automotive Landscape from 1985 to 2011
Figure 8: Motorisation Rate in China
Figure 9: Growth of the Car Market in the PRC
Figure 10: Market Shares of Car Companies according to Diehlmann et al.
Figure 11: Overview of the Market Shares in the PRC in 2010 according to Mull
Figure 12: Market Leader in the Premium Passenger Car Market
Figure 13: Development of Car Demographics in China
Figure 14: Vehicle Sales by Segment
Figure 15: Forecast of the GDP Development
Figure 16: Development of the Labour Costs
Figure 17: Purchasing Power of Private Households
Figure 18: GDP Growth of the different Provinces
Figure 19: Premium Segment Development
Figure 20: Share of state-owned Companies in the Provinces
Figure 21: Comparison of the GDP per capita
Figure 22: Geographical Overview of the Provinces
Figure 23: Purchasing Criteria for Cars
Figure 24: Development of Carbon Dioxide Emissions in selected Countries
Figure 25: Cities supported by the Chinese Governance
Figure 26: Chinese R&D Expenditures from 2002 to 2011
Figure 27: Chinese R&D Expenditures until 2015
Figure 28: Traffic Flow compared to the Number of Inhabitants
Figure 29: Brand Awareness of Chinese Car Consumers
Figure 30: Dimensions of Internationalisation
Figure 31: Legal Entities of German Companies in the PRC
Figure 32: Competence Centres of the Automotive Industry
Figure 33: Available Income by Region
Figure 34: Co-operations in the Chinese Automotive Sector
Figure 35: Financial Figures of FAW
Figure 36: Financial Figures of SAIC
Figure 37: Financial Figures of BYD
Figure 38: Locations of the Volkswagen Group in the PRC
Figure 39: Locating Strategy of the Volkswagen Group
Figure 40: 3-Phase Introduction of E-Mobility of VW in China
Figure 41: Representations of BMW in the PRC
Figure 42: Customer Orientation
Figure 43: Brand Survey
Figure 44: The Brand Desire China 100
Figure 45: Dealer Outlets of the BMW Group
Figure 46: BMW Dealer Staff Development & BMW Training Facilities Status
Figure 47: Sold Models in 2011
Figure 48: SWOT-Analysis of the Volkswagen Group in the PRC
Figure 49: SWOT-Analysis of the BMW Group in the PRC
List of Abbreviations
illustration not visible in this excerpt
1 The Biggest Automobile Market of the World
China’s economy is growing year by year. The persistent growth has affected the auto- mobile sector in particular. Increasing income and the passenger vehicle as an exclusive status-symbol has risen the private demand. In 2009, the PRC overtook the USA as the biggest automotive market in the world in production (figure 1) as well as in sales (figure 2). This trend will certainly continue: With economic problems like stagnating real income, rising raw material prices and credit-driven consumerism in the industrial countries the importance of the Chinese market for car companies will even grow. Saturated passenger car markets in the USA and Western Europe1 and low rates of motorisation in new auto- motive markets like China focus the attention of the market participants on these new, growing markets. But the upward trend has already shown a downside. Increasing de- pendency on the strong politically influenced market and claims about know-how transfer are exemplary threats.
As German enterprises in this industrial sector are popular worldwide and the car-industry is the key industry in our country, the internationalisation strategies of German automotive companies in China will be analysed in the following. The trend of the Chinese automobi- le market can be summarised in a quote of Dieter Zetsche, CEO of Daimler: “Wir fahren noch nicht im höchsten Gang, wir können noch mehr”.2 The quote relates to the expected turnover and profit records of Daimler in 2011, which were mainly based on the success in the PRC: The Swabian vehicle manufacturer sold 198,500 automobiles in China.3 In spite of these difficulties, the automotive market in the PRC is very attractive, especially for the well-known German firms. However, the companies should know how to manage the problems in China. Therefore, the choice of a suitable strategy of internationalisation is crucial.
By definition internationalisation strategy is the orientation of corporate development by growth in different foreign markets.4 In contrast to an international market entry strategy, an internationalisation strategy is not only about starting business in a foreign market, but also developing a strategy in a market which has already been entered. The focus of this bachelor thesis is put on the passenger vehicle market and lines out why the Chinese market is profitable and attractive for German and international manufacturers in general. Moreover, it shows how to deal with the problems and to use the opportunities regarding the dimensions of internationalisation.
Firstly, the PEST-Analysis of the Chinese automobile market lines out the political-legal, economic, socio-cultural and technological factors. In such a rapidly changing and grow- ing as well as culturally totally different country like the PRC, the framework conditions and circumstances are of big importance for foreign enterprises willing to do business there. Consequently, the market analysis is the longest part of this paper and gives a broad overview of the essential opportunities and threats.
The third chapter deals with possible internationalisation strategies for China by showing possibilities of timing and market development strategies plus options for locating busi- ness. It figures out whether there are ideal scenarios how to work on the PRC’s automo- bile market. Additionally, it identifies strengths and weaknesses of the non-domestic par- ticipants.
This is also a content of the fourth chapter, in which the internationalisation strategies of two German enterprises are analysed. VW was the first automobile manufacturer to rec- ognise the potential of the PRC’s car market. Hence, it entered the market very early. In contrast to that, BMW started its business in China relatively late, but developed the mar- ket in evolutionary steps.
At the end of this thesis, the results are summarised in two SWOT-analyses of both firms including measures to deal with threats in the PRC and showing how to benefit from strengths and opportunities.
2 Market Analysis of the Chinese Automotive Market
The PEST-Analysis gives an insight into the macro-economic conditions of country- or sector-specific characteristics. It shows opportunities and threats of a market. The follow- ing step is an analysis of the external political-legal, economic, socio-cultural and techno- logical pre-conditions for doing business in the important and dynamic car market of the PRC.
2.1 Political-legal Factors
Especially in a different political system like the socialist market economy of the PRC, it is interesting to inquire how the political leadership influences the legislation in a specific industry and in common. Firstly, this chapter shows the interactions between the government and the automotive sector in the past with a special focus on the WTO-entry in 2001. After that, the impacts of the 12th Five-Year Plan of the PRC on this specific industry are portrayed. At the end, current problems of legal uncertainty and intellectual property with examples of the car industry are discussed.
2.1.1 Political Circumstances for the Development of the Car Industry
The start of the Chinese automotive sector was in 1953, when the Soviet sister state helped to build a production facility. In the following years, the number of car manufacturers increased up to the amount of 56 in 1980. This was due to military reasons. Hence, especially utility vehicles were produced. In 1958, the first passenger car “Dong Feng” was produced. A characteristic feature of the Chinese car industry in this time was the extremely high level of vertical integration.5
In 1978, Deng Xiaoping created the basis for the success of the PRC by establishing a socialist market economy. Typical elements of the socialist market economy are the communistic state-owned main industries. The government controls and regulates the structure of the markets, for instance. The income should be allocated by quality and quantity of the work, which is a characteristic for capitalism.6 Right at the beginning, this system worked very well. Consequently, the PRCs growth rates increased and the de- mand for cars rose rapidly. However, the domestic industry was not able to satisfy it. At this time, the import of cars was 20-times higher than the domestic automobile produc- tion. High tariffs on cars lead to the number of 350,000 smuggled cars in 1985.
In this situation, the PRCs government decided to allow foreign car manufacturers to enter the Chinese market if they were willing to co-operate in a joint venture. The aim was to support the domestic automobile production through foreign technology and capital.
Among the Chinese provinces, a battle for the FDI broke out. As a consequence, numer- ous production facilities with low output capacity arose. Volkswagen was the first foreign company to enter the Chinese market. It founded a joint venture with the Shanghai Auto- motive Industry Co. Ltd. and built cooperatively the model “Santana”. Given the success of the German pioneer and increasing liberalisation, other foreign automotive companies expanded their business to the PRC. If the search for a suitable partner delayed their entry, they decided to start with representations instead of joint ventures.7 The start of the support of private enterprises in common in 1988 has simplified the finding of a partner for the joint ventures, too. The reason behind this is that the government-owned corpora- tions are known as inefficient and bureaucratic.8
Particularly because the automotive markets in North America and Western Europe are saturated, every big car builder of the world entered China (figure 3) by 2003. Nowadays, this industry is the most important in the PRC. In this context, it is no surprise that China has developed not only to the world’s-biggest automotive market but car producer, too.9 To pave the way for the great success of the Chinese automotive industry the govern- ment adopted directives for the segment. Of vital importance is the directive for the Chi- nese automotive sector of 2004: The aims of it are the creation and establishment of a Chinese car brand within China and on the world market. It defines standards of maxi- mum fuel consumption, energy saving through alternative fuels and should support the own research and development as well as harmonising the decisions of the enterprises and the government.10
The great influence of the government on the industry is characteristic for the model of a socialist market economy. Compared to the French (PSA Peugeot Citroen11, Renault) and Italian (Fiat12 ) automobile corporations, which need to be supported by their govern- ments through stimulating the economy, the PRCs system demonstrates the weaknesses of the Western systems: lack of effectiveness and political incapacity to act. The Chinese model is more flexible as well as efficient and supports Chinese automobile manufactur- ers. In consequence, the competition in the Chinese automotive market increases.13 In summary, market economy under communistic power is no contrast or to say it in the words of Deng Xiaoping: “Do not care if the cat is black or white, what matters, is it catch- es the mice”.
2.1.2 China’s entry to the WTO
When China joined the WTO in December 2001, Director General Mike Moore lined out the role of China within this organization and the whole world: “With China’s membership, the WTO will take a major step toward becoming a truly world organization”.14 The WTO aims to boost the international exchange of goods and services and therefore builds on the GATT, GATS and TRIPS agreement. “The General Agreement on Tariffs and Trade” contains the reduction of trade barriers and some regulations concerning subsidiary com- panies and joint ventures.
Of course China’s accession had not only an influence on the WTO but also affected the country itself. From then on, it had to deal with a completely new situation. Since the People’s Republic of China has joined the WTO, it has gradually dropped the tariffs and has degraded the market entry barriers in the automotive sector. Before China became a member of the organisation, the country pursued a strategy of import substitution. That means that it was forbidden to import goods which were also available in China or could have negative effects to the sales of other Chinese products. With the accession to the WTO, China had to adapt the organisations rules, but it is a creeping process.
Nowadays, goods and branches are classified by their importance for the economic de- velopment, the most important goods are known as “supported goods”, e.g. cars. Auto- motive enterprises are helped by tax abatement and tax relief.15 Secondly, the high import duties for foreign cars and car equipment protected the domestic automotive industry. Moreover, import licences and import quotas made it even more difficult for foreign car companies. The import quotas were progressively decreased and abolished in 2005. The tariffs for car equipment were dipped and modified. From 2001 to 2005 the tariffs sagged to 25%. The quotes have not completely disposed, because the Chinese government feared that companies could abuse China to assemble the cars.16 For finished automo- biles the custom is 25% since 200617, which is relatively low compared to Russia, India and MERCOSUR- and ASEAN-countries (figure 4). In the current trade conflict with the USA, China imposed punitive tariffs on cars which are produced in the United States.18 In addition, the entry to the WTO meant a liberalisation of the distribution of automobiles. Nowadays, foreigners are allowed to sell cars in the PRC, but car sales companies with more than 30 sales offices and more than one automobile brand have to be dominated by a Chinese co-owner.19
To sum it up, for the domestic car industry, Chinas accession to the WTO meant on the one hand stronger competition, but on the other gave foreign enterprises the opportunity to sell their cars on the Chinese market. Consequently, the structure of the Chinese au- tomotive sector changed from a volume-production to a real market-based competition.
2.1.3 Involvement in the 12th Five-Year Plan
The short-run economic roadmap of the Chinese politics is the Five-Year Plan. The 12th Five-Year Plan was adopted by the National People’s Congress in March 2011. Its main aims are on the one hand, the development and securing growth on a long-term basis and on the other the improvement of the quality of growth. Besides that, it is also aimed at a change of the model for growth, a reduction of the social and regional disparity and an increasing national competitiveness of different sectors, environmental protection and efficient use of resources and energy.20
These points of the plan have a huge impact on the automotive industry of the PRC. The creation of a growth of at least 10% is the declared objective, which shall be reached by influencing the market in the short-term and structuring the market in the long-run. The support of credit-driven car purchases of privates, tax incentives for buying small cars, the introduction of scrapping premiums, strengthening domestic car manufacturers and the simplification of car purchases, particularly in rural areas, are measures to influence the market on the short-run.
People who live on the countryside receive up to 10% price discount, they do not have to pay maintenance fees for roads and their sales tax is reduced from 10% to 5%. In total, the government spends ¥5bn in building up a more prosperous consumer class in rural regions.21 The long-term measure the reorganisation of the producer market by supporting Chinese producers, shall help to satisfy the customer needs. The number of car producers shall be significantly reduced through acquisitions, the production volumes of the joint companies shall annually reach more than two million units. This also leverages synergies with the other activities in the long-run, widening the research & development activities and supporting alternative propulsions, too.
However, the automotive industry is also influenced by the non-economic targets of the Five-Year Plan that were mentioned at the beginning: The enforcement of the domestic demand and reduction of the social and regional prosperity gap by increasing salaries and wage are great chances for the German car companies to sell their expensive high- quality cars. Furthermore, the Chinese economy should become greener with lowering the consumption of resources and the carbon dioxide emissions, which should make the companies more aware of the need to develop competitive E-Cars. The governance plans to spend ¥100bn in the support for new energy vehicles like plug-In-electric and pure E-vehicles.22 In total, this plan supports the German car builders because it increas- es the sales potential for the German companies by reducing the control of the market and continuing the trend of privatisation, even if the rise of big Chinese competitors would be an attack of the dominating German enterprises.23
2.1.4 Legal Uncertainty
Despite making extensive progress, the legal system of the People’s Republic of China is still in a building phase and can be the root of severe problems for foreign companies. They especially fear corruption as a consequence of a confusing legal system as shown in figure 5. A distribution of power in executive, judiciary and legislature does not exist. Consequently, the laws are very general, show considerable gaps and are often not pub- lished or accessible. The jurisdiction of the courts and authorities are mostly not transpar- ent and are not free from undue political influence, even the judges are paid and appoint- ed by local government authorities. Especially foreigners need to understand that to be right and to be proven right are sometimes two different things in the PRC because judgements are discussed with people from the local government. Furthermore, a lot of Chinese companies do not forgive to be brought to justice and terminate the relationship because they lost their face. Thus, the best solutions are compromises, but they have not been always possible.24
Even if there was an independent judge in the western sense, you would still fear the wrath of the PRCs government after a successful legal action. When General Motors overtook the automotive industry of the South-Korean company Daewoo, the Chinese enterprise Chery launched a new model called “QQ” which looked quite similar to the Daewoo Matiz. The Americans went to court and the judge indicated that GM would be right. However, he unofficially asked them, if they really wanted to win the trial referring to their joint ventures in the PRC. Finally, GM waived the right.25
Nonetheless, there is hope for improvement for foreign companies: Since the accession to the WTO in 2001, China has to eliminate oppression and therefore, tries to improve the training of legal staff and to enact clear and consistent laws to harmonise the legislation with the requirements of the WTO.
The best way to protect a company against Chinese legal pitfalls is networking or ex- pressed in a Chinese phrase “Guanxi”. Numerous decisions are influenced by Guanxi. Treaties are not as helpful to achieve your right as in Germany. For the inhabitants of the PRC, a treaty is simply a declaration of intent with renegotiation-room. Non-compliance with treaties is not seen as breach of contract but as adjustment of changes.26 In conclusion, there is still room for improvement by filling gaps in the legislation and there are still problems with arbitrary use of state power in the PRC. An example of this is the case of the young entrepreneur Nils Jennrich: The German spent 127 days in jail with no solid evidence of the guilt because the Chinese judiciary needs to deter smugglers of art.27
Clearly, the legal uncertainty is problematic. However, the legal environment improves and simplifies doing business in the PRC.
2.1.5 Management of Intellectual Property
The judicial area with the largest conflict potential is the intellectual property. According to Wallentowitz et al., it is the most feared risk of producing in China (Figure 5). Complaints against product piracy of foreign enterprises are a common occurrence. According to Reisach et al., the whole governance system including all companies would collapse without pirated software, especially in the strongholds of counterfeiting and piracy. 69% of forgeries confiscated by the American customs were made in China and as reported by the German Machine and Plant Engineering Association 70% of pirate copies were pro- duced in the PRC, a lost turnover of €30bn. Chinese companies did not only copy the organisational structure of Siemens but even the brand name, business records, distribu- tion structure and corporate processes of NEC, a Japanese provider of information tech- nology. In consequence, they could pretend to be this corporation.28
Chinese people do not have a guilty conscience when imitating and copy things. They are culturally influenced by Confucius who said: “By three methods we may learn wisdom: First by reflection, which is noblest; second, by imitation, which is easiest; and third by experience, which is the bitterest”.29 In consonance, this saying shows that Chinese be- lieve that it is an honour to copy. They have not had conflicts with this attitude so far, because they have not been part of technical innovations for decades. They simply follow the footsteps of the Japanese, who on the one hand imitated especially the products of electronic enterprises and manufactured them cost-effectively. This trend is on the hand, intensified by the education with the focus on listening, imitating and reproducing and on the other strengthened by the feeling that the PRC was disadvantaged in the past and quickly has to reach a competitive level.30
Currently, the case of stolen patents in the automotive sector attracts attention. The joint venture partner of VW, the First Automotive Works obtained offers for components from the suppliers of the VW “MQ 200” Gearbox. FAW wants to use this gearbox for their “Bes- turn B50”, a competitor for models of VW and the subsidiary Škoda at the Russian car market. Up to now, European car companies have recognised mainly that Chinese part- ners imitated the design. A new dimension of intellectual property theft, however, is their copying of construction plans. Last year, a supplier informed Volkswagen that the joint venture partner copied an engine which is in the models Polo and Golf. FAW commissioned the suppliers to produce important components like the cylinder head and the crankshaft. When the Chairman of the Board of Management for Volkswagen, Martin Winterkorn referred to this incident Xu Jianyi, the CEO of FAW promised to solve the problem. Surprisingly, the Chinese car builder started producing the engine in their factory in Changchun in July. VW has to wait with legal actions until next year when the FAWmodels should be marketed. Peter Schnitzer, CEO of the Schnitzer Group, which is a consultancy with focus on the automotive sector, thinks that the only way to protect your products from being imitated is to make them difficult to copy.31
Furthermore, enterprises have the possibility to include a non-compete obligation to pro- tect the confidentiality of the transferred know how in the contract. In any case, products should be branded in a distinctive way and protection rights should be registered as soon as possible. Moreover, companies can join organisations like the Quality Brand Protection Committee (QBPC) or the German Anti-Counterfeiting Association (APM). The target of the QBPC, whose members are for example Daimler Chrysler and Siemens, is to make the Chinese authorities aware of the importance of the protection of intellectual proper- ty.32 Enterprises like BMW and Bosch participate in APM for conditions “in which innova- tive activities can develop and count on effective protection”.3334 Finally, the accession to the WTO revised the Chinese patent, copyright and trademark law. The Treaty on Intel- lectual Property Rights (TRIPS) is part of the WTO-agreement and broadens the protect- ed right. Trademark is for instance defined as words, pictures, characters, numbers and combination of colours.
In the meanwhile, the big enterprises of the PRC are interested in protecting the intellec- tual property. This the biggest progress. The reason behind this is that the PRC moved from an importer to technology to an exporter and the influential corporations fear the technology leakage between them and the SMEs that benefit from an incomplete legisla- tion.35
In summary, the protection of intellectual property has improved during the last years and should not be the reason for staying away from the large Chinese market, especially in the automotive industry impossible. Enterprises should definitely create the basis for legal actions by the registration of IP-rights and secrecy agreements. Automotive companies which are not in the PRC by now should take the step even if there are some risks, or to conclude the political analysis with the Chinese philosopher Lao-tzu: “A journey of a thou- sand miles begins with a single step”.36
2.2 Economic Factors
Furthermore, the economic framework is very important for starting or expanding business in a foreign country. Therefore, the most important economic indicators of the PRC of the current and future situation are relevant for the automobile market. An analysis of the automotive supply and financing market also involves the situation on these markets and end up the economic factors.
2.2.1 Economic Development
China is from an economic point of view the winner of the last years. In this respect, this chapter is an analysis of the essential indicators. The economic challenges from the current Five-Year Plan will be discussed, too.
The official unemployment rate of China is currently at about 4% but does not include migrant workers37. With more than two million employees the automotive industry contributes its part to the low number of unemployed.38
The export growth rate was 20.3% in 2011. For the current year, the rate is expected to shrink to 8.3%. Imports reached USD1,980bn3940 in 2011 with a year-on-year improve- ment of 24.9%41 - with numbers in this magnitude it is no surprise that China is also one of Germany’s most important trading partners.42 The current euro crisis has a huge im- pact on the Chinese exports. Hence, the government is really interested in a solution for the crisis.43 Particularly with reference to cars, it has become more and more important. The Chinese car industry affects the Chinese trade balance through car exports to coun- tries in Africa, e.g. South Africa or Egypt and Asia, Iraq for instance.44 The Foreign Direct Investment in the PRC fell from USD105.1bn to USD100bn.45 To get more FDI in future- orientated technological sectors like the automotive industry, the Ministry of Commerce simplifies authorizing procedures, provides land to better conditions and helps with build- ing up logistics, research and development centres.46
Amounts of FDI and a flow of goods in this magnitude of course have an effect on the exchange rate. Since 2005, the currency has been linked to a basket of currencies but the composition of it is not divulgated. For the PRC, it is quite difficult to allow their cur- rency to appreciate because it is the main creditor of the USA and an appreciation of the Yuan leads to a devaluation of the US dollar. Totally, the PRC has gold and currency reserves worth USD3,236bn at the 31st December of the last year.47 Because the EU and the USA put pressure on the governance, China is going to appreciate its currency and in the same step switch from US-bonds to others. The latest trend is to invest money in Western company purchases.48 In the nearer future, the currency Yuan will recover against the US dollar (from 6.46 in 2011 to expected 6.30 ¥/USD in 2012) and the Euro (from 9.01 ¥/€ in 2011 to 8.19 ¥/€ in 2012). The consequence for the automotive industry is that exports from the PRC will become less attractive in opposition to imports. Hence, companies are able to import raw materials and components cheaper.49 A target of the government is to make the Yuan a world currency. To reach this goal, the Yuan has to float. So the government must quit the link to the currency basket. A first step is the liber- alisation of payment transactions and invoicing of imports and exports in Yuan.50 There- fore, the PRC established the Renminbi trade settlement, which simplifies doing business for non-domestic enterprises in the PRC. In many cases, in the automotive sector for example, companies have to bring intermediate products or components to the PRC, which were transacted in euro, US dollar or other currencies. Such transactions were subject to the risk of the interventions in the exchange-rate of the Yuan. The Renminbi Trade Settlement Scheme gives subsidiaries in China the possibility to pay in their base currency so they do not have currency effects.51 In the present debt crises of Europe and the USA it is a solid alternative to use the Yuan for transactions.
Furthermore, the PRC had the second highest GDP in the world with USD7,298bn in 2011 and it will probably grow to over USD7,990bn in 201252 and USD25,584bn in 2030.53 The growth rates of the GDP are even more impressive as the growth in the au- tomotive sector has been much higher, e.g. in 2009 the growth rate of GDP was 9.0% and of the automobile sector 24.6%.54 In general the rate went down from 10.3% in 2010 to 9.2% in the following year and will be 8.3% this year.55 However, these incredible num- bers lose a bit of their value looking on the figures of GDP per capita. The PRC reached USD5,413 in 2011 and will have USD5,898 in 2012. Countries like Serbia, Peru or Na- mibia are doing better in this field.56 Compared to further growth figures, the Chinese economy dwindles currently. However, this fits to the Five-Year Plan as explained in 2.1.3. With low inflation rates, e.g. 1.8% in July 201257, the government can also stimulate economy by extending money supply.
As reported in the Five-Year Plan, focusing more on qualitative instead of quantitative growth is a declared objective. Reducing the export dependence by strengthening the domestic demand is a vital aim, too. The “adjusting screws” for this problem are on the one hand, to raise the wages and salaries or on the other to push demographic increase. However, this is rather unlikely after decades of one-child policy. Consequently, the government tries to raise wages, especially in the booming costal area to retain and recruit skilled personnel and increase the purchasing power.
One key factor in achieving this objective is to partly stay the world’s manufacturing base but particularly build capacity in the research and development field58 by changing the strategy towards technological leadership. The government hopes to create an environ- ment for higher wages and salaries in the metropolises and major population centres of the East.
Furthermore, it is also important to support the economies of the provinces in other parts of the country. The goal of the government is to relocate the production bases in the in- dustrial centres on the East-coast to poorer regions.59 This “go west” strategy was part of the last two Five-Year Plans of the PRC60 and besides the target of helping the under- developed provinces, another benefit are a lot of natural resources and minerals in the Chinese hinterland, which are important for the production sector. The relocation of the manufacturing base to areas which are rich in natural resources reduces transaction costs and increases the efficiency of this sector. Rare-earth metals are probably the most important resources, 95% of the rare earths supply of the world is produced in China.61 These chemical elements are e.g. very important for components of electrified cars as shown in figure 6 and other high-tech products. Thus, the Chinese government uses ex- port restrictions as well as prohibitions and export taxes on the rare earth metals, which had a huge impact on the export of the chemical elements.62
Although the economic indicators are slowing down compared to previous years, the Chinese economy will maintain the positive trend. This also increases the attractiveness of the Chinese automotive market for non-domestic participants.
2.2.2 Automotive Market Situation
At the end of its first year VW shared the car market only with two foreign companies. As shown in figure 7, the automotive landscape changed completely from 1985 to 2011. In the following, the important factors for the current development of the automobile market in China as well as the biggest participants, preferred car segments and trends of mobility will be listed and explained.
As already mentioned at the beginning, in 2009 the PRC was the market with the highest production volume of automobiles (figure 1). In 2010, China reached a production volume of 18 million cars and increasing production capacities will maintain this trend.63 With a very low car density and a growing purchasing power, the car market in the PRC has become the most important sales market for the companies. The vehicle density was 17.7 in 2008, 21.6 in 2009, in 2010 26.0 and reached 31.1 passenger cars per 1,000 inhabitants in 2011 (figure 8). Experts expect a fast growing motorization rate in the fu- ture. This trend is confirmed by the sales figures of cars in China in the last ten years, they show a growth of 47% in 2009 and 34% in 2010 and reached more than 17 million in 2011 (Figure 2). Even if the growth is smaller in 2011 with a rate of 9%, the positive ten- dency will continue in 2012 (figure 9). In addition, the Ministry of Commerce announced in December 2011 that the government will support the import of automobiles.64 Contrary to that, the Western car markets have a decreasing number of sold vehicles since 2007.65 However, there are some regions in China which have no more capacity for new vehicle registrations. In Beijing and Shanghai the transport infrastructure is that much overbur- dened that vehicle registrations are raffled and number plates are sold at actions. These cities have a problem with traffic gridlocks and lack of car parks.66 In these metropolises, people are less interested in cars because the transportation infrastructure is very good and owners of cars have to pay tolls and road usage fees in most provinces of the coun- try.67
Substitution products like electric scooters meet the needs better with the problems men- tioned above. In 2010, 120 million of these scooters were registered in China68 and the market for it will grow: The German automotive supplier Bosch provides a joint venture with the Chinese company Ningbo Polaris, one of the biggest manufacturers for electric motors for two-wheeled vehicles. The production share of electric scooters of the PRC in the world is currently 98%, 27 million scooters with electric motors were produced last year and in 2020, 46 million per year are expected.69 With an increase in income of 9.1% in 2011 and a growing purchasing power, the rural areas have come into the focus of the car manufacturers.70 The car sales by segment will nearly be the same in 2025 as it was in 2011. The sales figures, however, will increase from 23 million to 35 million sold cars in 2025.71
The result of 100 competitors and the joint venture regulation (see 3.2.4) is an opaque, heterogeneous and complex structure, which makes it very hard to clearly identify market shares of the single participants.72 Diehlmann et al. (figure 10) wrote VW had a share of 8.7% in 2010, followed by GM (4.6%), Toyota (3.7%), Honda (3.6%), Hyundai (3.6%) and Nissan (3.5%). The same six enterprises are leading in the figures of Mull73 (data of Jan- uary 2012): the China-pioneer Volkswagen had the largest share in May 2012 with 20%, followed by GM (10%), Hyundai (9%), Toyota (6%), Nissan (6%) and Honda (4%). Unfor- tunately the state-owned automobile manufacturers are not mentioned in one of the over- views of market shares. As they are involved in a lot of JVs, it is probably hard to work out the number of sold cars in total. According to Sandner et al., SAIC sold 4.6 million vehi- cles in 201074 followed by Dongfeng (2.7 million)75 and FAW (2.6 million). Orientated on Geely’s 3% (figure 11) with 560,000 sold cars in 201076 minus the exports and non- passenger vehicles like busses (SAIC and FAW) or trucks (Dongfeng) the three compa- nies would probably be in the top ten. As a lot of cars of the state-owned enterprises are exported to Africa as well as Asia, the shares of them are probably lower than the rates of the foreign market leaders. BYD after six non-Chinese is the first Chinese car enterprise (figure 11) with a share of 3%. In the figures of Müller and Mull BMW and Daimler do not appear. According to Diehlmann et al., BMW (0.2%) and Daimler (rounded off to 0,0%) had no significant shares in 2010 in total, but Audi (included in VW) above BMW and Daimler was and is the leading company in the Chinese car premium segment (figure 12).77 Market shares in the Chinese automotive market are especially for volume- manufacturer like VW very important. Firstly, because currently most of the 170 million potential customers are first time customers, who are easier affected by the performance and brand name of a company than experienced older car buyers (figure 29). Secondly, the car market in the PRC is driven by the younger generation nowadays. But as shown in figure 13, there will be a demographical change in the period between 2015 and 2020. Consequently, many people in the current main target group will be the target audience in the future, too. So if the car enterprises now miss the chance to be in people’s minds in a positive way, they will have to work even harder later on. It is of great importance is to fit the needs of the Chinese automotive consumer. Presently, the biggest market segments are the compact class followed by small cars because many Chinese consumers do not have the money for more expensive automobiles (figure 14). Particularly for the new mar- kets in the Centre and the West of the country cheaper small -sized cars will become important. This is essential to keep the competitors GM and Toyota at distance. VW has recognised this potential and wants to create cars that cost less than €8,000.78 However, also the middle-class automobiles are highly appreciated by large parts of the Chinese population as well as SUVs. The popularity of SUVs is caused by the new criteria for purchasing cars: Safety, driving comfort and car size become more and more important.79 But this is not only a Chinese trend. In Germany every seventh new registered car is a SUV, too.80 Together with the sport class the SUVs had the highest growth rates between January and May 2011 with 40% and the luxury class achieved 25%, too. These major price segments will get more in focus with an emerging middle and upper-class, already today the PRC has the hugest sales of Daimler “S class”, BMW’s “7 series” and Audi “A8”.81 These three companies together have about 75% market shares in the PRC’s premium segment.82 However, the competition in this segment will increase, for instance, the Chinese manufacturer Qoros plans to widen its activities.83
Although they lost shares in 201184, presumably even in the nearer future Great Wall, BYD, Geely & Co. will catch up and gain more market shares with the help of the govern- ance. The “Automotive Industry Policy” from 2004 has the aim to strengthen the Chinese automobile enterprises by creating big corporations through mergers and acquisitions e.g. the acquisition of the Nanjing Automobile Group to Shanghai Automotive Industry Corpo- ration was supported by the government.85 Additionally, the proper strategy for the price- sensitive mass market in the PRC is cost leadership. The result will be a price war in the future. To remain competitive compared to Chery, Geely and others, companies have to establish cheap family friendly brands like Škoda of VW or Chevrolet of GM.86 Besides that, the entry-regulation of the Chinese market in the automotive sector is very helpful to the domestic car manufacturers: As mentioned in 2.1, foreign automotive companies have to find a Chinese joint venture partner and with the problems of intellectual property (see 2.1.5) and legal uncertainty (see 2.1.4) in many cases the partnership was misused for illegal but unpunished know-how transfer. If this trend is progressing, it is only a question of time until the domestic car industry will catch up market shares.87 Furthermore, the differential treatment of Chinese and foreign companies is an aid for the domestic indus- try.88 From a technological point of view, the electric motor will become very important in the PRC. China is already the leading nation in this technology and the biggest market for this type of cars. Recently the first electric busses have been exported to Germany.89 Additionally to the joint venture regulation for the production of cars mentioned in the beginning, automobile companies have to sell the E-Cars under a Chinese trademark. The first attempts of Daimler with its partner BYD to produce E-vehicles are eyed suspi- ciously because a car of this type of the joint venture partner went up in flames and caused a horrible accident in Shenzhen in May this year.90 In contrast to that, BMW’s plans cause more optimism: It has already created a trademark together with its partner Brilliance, “Zhi Nuo” which means “promise”91 - hopefully a promise for safe and envi- ronmental friendly vehicles.
All in all the situation of the automotive market is very good, especially for the well-known German manufacturers VW and BMW.
2.2.3 Automobile Suppliers
It is necessary to analyse the framework for the suppliers in the PRC for two reasons: Firstly, automobile companies extremely depend on the quality of the products of their suppliers. Furthermore, the industry is forced to come to the production market because of long delivery times caused by congestion of Chinese ports and adversity occurring customs.92 Moreover, existing huge production capacities in the automotive sector induce a high demand of machinery and other equipment particularly at Chinese market partici- pants.
Lanza et al. believe that the capacities for manufacturing cars will come up to 35 million in 2015. About 8,000 automotive suppliers in the PRC compete for this new market poten- tial. German market participants have about 180 production bases and 60,000 employ- ees.93 Growth rates of conditioning systems, engines, ignition systems, starters and alter- nators that reached 100% in 2011 will continue and will make the PRC the number one for automotive suppliers in the long term.94 This also applies for German suppliers which occupied the second position behind the Japanese in 2011.95 Therefore, it is no surprise that the companies in this industry announced that they are going to raise their capacities by 30%96, e.g. Continental wants to recruit 5,000 new employees in 2012.97 Even if the pressure of competition will rise and companies have to reduce the costs of the products, growth rates of the component market makes the Chinese market interest- ing: the worldwide market will grow from €410bn now to €660bn in 2025. Nearly 50% of the €250bn additional value will be in the Chinese component market.98 One strategy to secure success is to retain a car company, even with the risk of depending on your part- ner. Suppliers should focus on the Chinese OEMs and try to convince them with techno- logical leadership - contrary to low-cost but low-quality domestic companies. However, the rising cost pressure in the automotive sector will be partially passed to the suppliers so besides the technological quality, enterprises should ensure that they work market- and client-orientated.99
In achieving these objectives, the component manufacturers plan to locate more research and development departments in the PRC, even though they fear technology theft in joint ventures. This is the most popular form of market entry and development in the Chinese supply market, too.100 Even if the growth in the car segment slows down the next years, the manufacturers can sell their products to automobile substitution products like electric scooters. For example, the Robert Bosch GmbH cooperates with Ningbo Polaris and produces wheel hub motors for E-Bikes and -scooters.101 The importance of the Chinese market for car suppliers is undisputed as Rolf Breidenbach, CEO of Hella underlined: “In den Jahren 2022-25 wird der chinesische Automarkt so groß wie der in Europa und Amerika zusamen sein”.102
So even in the future, the automobile companies in the PRC can always rely on the highquality products of Bosch, Denso, Continental & Co.
2.2.4 Automotive Financing Sector
The shift from pure vehicle manufacturers to mobility service providers also reached the Chinese automobile market. Particularly captives, manufacturer-linked automotive banks, spread to the PRC. The automobile banks have learnt from the mistakes of the first tries of the state-owned banks to finance cars, which did not succeed in this sector even though they had the best circumstances: These banks were able to build up huge liquidity provisions because of a lack of investment opportunities for private citizens. Many people have given their savings (savings ratio about 40%) to the banks.103 The credit institutions used parts of it for vehicle financing of privates in the year 2000, the share of financed cars rose up to 18%.104 However, the state-owned banks made severe mistakes. They provided capital to uniform interest rates and local insurances had to carry the credit default risk. When the loss of accounts of the insurances increased and exceeded the premiums, the percentage of financed cars shrank down to 5%.105
In 2003, the Chinese government decided to open the automotive finance market for car companies. An enterprise of this field can apply for starting an automobile bank if it has assets worth at least €416m and an annual turnover of €2bn. The authorisation for the sector is under the control of the CBRC, the China Banking Regulatory Commission.106 The Volkswagen Finance China was the first WFOE that got a business permit and raised the starting capital of €50m in 2000. Up to now, all the big other car companies like Toyo- ta or GM have followed. Furthermore, companies in this sector have to make at least three consecutive years profits and the interest rate for the credit must not be under 10% and over 30% of the interest rate of the Chinese central bank.107 With the permission for leasing cars in 2007, the Chinese government strengthened the automotive financing sector, because they can serve multinational companies specifically with vehicle fleets. Nowadays, nearly 10% (worldwide average 49%) of the purchases of new cars are exter- nally financed, but there is still potential with the under-developed credit infrastructure and the lack of knowledge of financing options. When Chinese families wanted to buy a car a few years ago, they rather asked family members to lend them money than going to a credit institution.108 The automotive banks pin their hopes especially on the generation between 18 and 35. Their consumption behaviour is more Western. They want to have a higher standard of living including a good car, which is after an own home the most im- portant status symbol. Besides the customer finance, the automobile banks should also focus on purchase-financing support for the car dealers and should make them familiar with financial advice of customers. This is really important, because 70% of the potential Chinese car buyers are not only unaware of financing methods but also first time custom- ers. This is a chance for dealers and automotive banks to create a win-win situation by showing the customers ways of financing new, modern and good-looking cars.109
In summary, the rising interest in external financing makes producing and selling automobiles in the PRC more attractive.
2.3 Socio-cultural Factors
China is a very widespread country and is culturally deeply rooted with the Confucian tradition. The consequences for the society are regional and social disparities that influ- ence the income distribution. The culture has effects on the purchasing behaviour and helps to characterise the Chinese car consumer. The buying behaviour causes special measures for the marketing-mix. These four points are described in the following.
2.3.1 Distribution of Income and Disparities
A very important factor influencing the purchasing power is the available income. As men- tioned in 2.2.1, a higher income is also of interest to the Chinese governance. Further but moderate growth of the GDP (figure 15), urbanisation (see 2.3.2) and a rising level of education will foster the increase of salaries and wages as shown in figure 16.110 Of course this trend is very positive for the automotive industry because it enlarges the quantity and quality of potential customers. On the one hand, more people are able to buy cars and on the other the sales numbers of middle- and upper-class automobiles will increase. As figure 17 shows, particularly the upper middle class households, which earn between USD 4,800 and USD 12,000 monthly, will count 139 million people in 2015 and 222 million in 2025. Consequently, the shares of the different passenger car segments will change, as explained in 2.2.2. In the future, SUVs and upper-class vehicles will be- come more popular and will continue the impressive growth of the premium segment in the last years (figure 19).
However, the economic boom has not affected China evenly. In the middle of the last decade the income of people who lived in cities has been up to 80% higher than in rural areas.111 Since 2000 the PRC has not published its Gini coefficient, which measures the inequity among values of a frequency distribution. In 2000, the Gini index was 0.412 and in 2005 experts measured 0.47. A coefficient between 0.4 and 0.5 is a sign of a large income gap. The PRC has probably come close to this.112 Investments in automation of e.g. Foxconn, add to the problem because robots take jobs from the migrant workers. In the last years, a lot of Western Chinese travelled through the East to find work. That is why they are called migrant workers. With the relocation of the production plants from the East to the West this tendency reduces, but the increasing degree of automation ensures that their job perspectives will likely be in the construction industry.113 The reason for their movement is that particularly in the Western regions the share of state-owned enterprises (figure 20) is very high. In the course of restructuring of state-owned companies, 73 mil- lion people lost their jobs and left an underdeveloped economy back.114
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