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China’sNextRevolution:TransformingTheGlobalAutoIndustry
ByBillRusso
President,SynergisticsLimited
Summary:
HenryFord’sintroductionofthemovingassemblylinein1908changedtheworld:makingautomotivetransportationaffordableforthemasses,acceleratingtheindustrialrevolution,andshapingthedistributionofeconomicwealth.Whiletheworldhaswitnessedgreattechnologicaladvancesoverthepastcentury,theautomobileindustrystillresemblesthatwhichwaspioneeredoveracenturyago.Simplystated,thecrisisfacedbytoday’sautomotiveindustryhasalottodowiththeapplicationofa"onesizefitsall"20th‐centuryindustrialparadigmtoa21stcenturyglobalenvironment.ThispaperdescribeshowtherapidlyexpandingChinamarkethasbecomethecatalystdrivingthetransformationofthebusinessmodelandtechnologicalunderpinningsoftheglobalautoindustry.
Background
IwasrecentlyaskedwhetherHenryFordwouldbe“turningoverinhisgravebecauseofwhatishappeningtotheAmericancarindustry”.Myresponsewasthathewouldprobablybemoredisturbedbythefactthatthe“massproduction”businessmodelhasonlychangedincrementallyinover100yearssinceheintroducedit.Ford’sintroductionofthemovingassemblylinein1908changedtheworld:makingautomotivetransportationaffordableforthemasses,acceleratingtheindustrialrevolution,andshapingthedistributionofeconomicwealth.
While it is true that there have been significant technological advances as well asparadigmshifts inthewaytoorganizeautomotivesupplychainsandassemblyoperations,onecannotdenythefactthatthecartodayisstillpropelledbyaninternalcombustionengine,andisassembledina factoryenvironmentthatwouldnotseemverydifferenttoMr.Ford. Whiletheworldhaswitnessedgreattechnologicaladvancesoverthepastcentury,theautomobileindustrystillresemblesthatwhichwaspioneeredoveracenturyago. Simplystated, thecrisis facedbytoday’s automotive industry has a lot to do with the application of a "one size fits all" 20th‐centuryindustrialparadigmtoa21stcenturyglobalenvironment.
It isa lessonofhistorythatallgreatdynastiesmusteventuallybereplaced. This lessonalsoappliestobusinessmodels:theyareonlyrelevantforafiniteperiodoftimeandmustthenbetransformedorreplaced. Ford’s“MassProduction”paradigmwasthetransformationalshiftof the20thcentury–helpingtosparkaneraofmobilityandeconomicdevelopmentpreviouslyunrivaledinhistory.Itisatestamenttoitspowerthatithasonlybeenincrementallyupdatedinthistimeframe.Themostnotablerecentadaptationisthe“ToyotaProductionSystem”andit’sprinciplesof leanmanufacturing. However,many forces aredriving the transformationof theglobalautomotivebusinessmodel.
The first article of this series entitled The Coming Structural Realignment of China'sAutomotiveSectordescribedChina’semergenceasthelargestcarmarketintheworld,andthepotentialchangestothestructureofChinesedomesticindustry.ThesecondpaperentitledThePathtoGlobalizationofChina’sAutomotiveIndustryexplainedthechallengesfacedbyChineseOriginalEquipmentManufacturers(OEMs)intheireffortstoexpandinternationally.Thispaperdescribes how the rapidly expanding China market has become the catalyst driving thetransformation of the business model and technological underpinnings of the automotiveindustry.
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AcceleratingtheInevitableTransformation
As noted in the first article in this series, we are living in historic times. The globaleconomiccrisispresentstheworldwithacompellingcaseforchange,anditisintimesofcrisiswhentrulytransformationalchangesoftenoccur.Itisimportanttonotethattheeconomiccrisisis simply a triggering event that freezes debate on whether change is needed and opens upopportunities for collaboration among governments, industry competitors as well as betweengovernment and industry. Several macroeconomic and sociopolitical challenges are directlylinked with the automotive industry: the redistribution of global economic power, energydependence,globaltradebalanceandenvironmentalconcerns. ThesheersizeandinfluenceoftheAsianeconomies–especiallyChina–willtriggertheinevitableandoverduetransformationoftheautomotivebusinessmodel.
If you follow the trajectory of thepast several years, you find that the strength in theglobalautoindustryhasbeenshiftingeastwardtoplaceslikeIndiaandChina.Mostoftherecentgrowthintheworld’sautoindustryhasbeenintheAsia‐Pacificregion,andmorethanhalfofthatgrowthoverthenextdecadeisforecastedtocomefromChina.ThegrowinginfluencethatChinawields is not just its ability to influence standards and direction, but also its ability to createopportunitiesthroughpartnershipsfororganizationsthatarefinanciallyweakened.Asaresultof the developments in their home markets, automotive companies and their suppliers muststrive to deepen their participation in the Chinamarket if they hope to remain viable. It onlystandstoreasonthatcompaniesthathaveweakenedpositions intheirdomesticmarketwouldbenefitbyredistributingsomeoftheirfocustothegrowthmarketsandinparticularChina.
For 5 consecutivemonths in 2009, China has surpassed the US in total car sales,mostrecentlypostingMaysalesof1.12millionunitsversus925,824vehiclessold in theUSmarket.TheastonishinggrowthincardemandisadirectresultofmanyfactorsthatarefuelingChina’seconomy.Thisincludesthesignificantinvestmentmadeinthedevelopmentoftheinfrastructuretosupporttransportation.TheChinagovernmentviewstheautomotiveindustryasa“pillar”ofits economy since it brings technology, jobs and investment to the economy. As such, severalagencies of the China government play an active role in sponsoring initiatives to furtherstimulateautomotivedevelopmentandgrowth.Whileitmaynotbeapparenttotherestoftheworld, these initiativesareacceleratingnot justChina’seconomicdevelopment– theyarealsoacceleratingtheinevitabletransformationoftheautomotivebusinessmodel.
LeveragingtheEconomicCrisistoAchievePolicyObjectives
Thisyear, inorder to face the financial crisis,manynationalgovernmentshaveenactedstimulus plans designed to create jobs and stabilize the economy. In the case of China, thestimulusplanhasseveralintentions:
• Stimulatetheeconomywithaparticularfocusonbackboneindustries
• Pushahugeamountofcapitalthroughthebankingsystem(US$588billiontotalwith45%ofstimulustargetedatinfrastructuredevelopment)
• Drivedomesticconsumptiontoreducedependenceonexports
The China government launched the Automotive Industry Revitalization Plan in March, 2009.The plan included several features designed to stimulate the development of the automotivesector,including:
• Eight development goals for the industry from 2009 to 2011, designed to ensuredomesticgrowthofautomobileproductionandsales
• Reducehalfofsalestaxfor1.6literorsmallercars
• Removerestrictionsonautopurchases
• Boostautosalesincountryside
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• Subsidizenewminibusorlighttrucksalesforruralresidents
As a direct result, sales of vehicles engines with 1.6L or lower engines have grown by 56.5percentyear‐over‐year.Chineseconsumers–especiallyfirsttimecarbuyers‐areinfacthelpingto boost domestic demand and are taking advantage of the tax and other incentives currentlyavailable. The policy also encourages consumers to shop for more fuel‐efficient cars, whichsupports China’s efforts to reduce fuel consumption. Targeting stimulus actions towardspurchaseofvehicleswithlowerenginedisplacementhasthesecondaryeffectofcreatingdemandforsmaller,lower‐pricedvehicles–andthistiltstheplayingfieldtowardlocalChinesebrands.
FocusingtheDevelopmentofNewPropulsionTechnology
Asthesizeoftheautomarketinexorablyexpands,Chinawillplayanincreasinglykeyroleinthedevelopmentofnewautomotivetechnologies.Tosomepeoplewhoobservetheindustry,this seems counterintuitive. Most industry watchers believe that development leadership ispurelyafunctionofproductinnovation,andChinaisnotaplacewhereyouwillfindleading‐edgeinnovation,especiallyforautomobiles. TheChinaautomotivemarketisstillveryyoung,andinmanycasesthedomesticproducersofvehiclesthataresoldinChinaarealsofairlyearlyintheirdevelopment stage. But that is the view from the supply side. The areawhere China has theopportunitytoleadisonthedemandside.
China’semergenceastheleadingautomotivemarketintermsofsaleshasseveralimplications.Whilemostattentionhasbeenpaidtorelativesalesperformanceoftheforeignanddomesticcompanies,whatisarguablyofmorelong‐termsignificanceistheimpactofChina’smarketexpansiononenergyconsumptionandenvironment.Tenyearsago,Bejing,Xi’an,Shenyang,ShanghaiandGuangzhouwerealreadylistedamongtheTop10citieswiththeworstairpollution.Themassivegrowthoftheautomotivemarketonlyaddstotheproblem.Additionally,Chinaimportstwo‐thirdsofitsoil,anditsever‐increasingthirsthashadadramaticimpactonglobalenergyprices.Nodoubt,Chinahasaclearandcompellingneedtoreinventthepropulsiontechnologyoftheautomobile.Foralternativepropulsiontechnologiessuchascleandiesel,hybridandelectricvehiclesyouwillfindthatChinadoesnotleadthetechnologicaldevelopment.
Toaddressthis,China’sstimulusmeasuresaretargetinginitiativestoincreaseenergy
efficiencyandreducegreenhousegasemissionsbyreducingenergyintensity,increasingtheshareofrenewableenergyused,implementingtoughautoemissionsstandards,andaddinginvestmentsforcleanenergy.China’sMinisterofScienceandTechnology,Mr.WanGang–aformerautomotivedevelopmentengineerforAudi–hasrecentlyunveiledaplantosupportthedevelopmentofwhatChinacalls“NewEnergyVehicles”(NEVs).TheMinistryofScienceandTechnology,workingwiththeMinistryofFinanceandtheNationalDevelopmentandReformCommission,issponsoringanambitiousplantopromotetheuseofNEVsinitiallytargeting13pilotcities,whichincludeBeijing,Shanghai,Chongqing,Changchun,Dalian,Hangzhou,Jinan,Wuhan,Shenzhen,Hefei,Changsha,Kunming,andNanchang. Theplanincludessupportforthedevelopmentofenergy‐savingtechnologyforuseingovernmentfleets,includingbuses,postal,andsanitationvehicles.Theplantargetsthedeploymentof60,000energysavingvehiclesinChinaby2012.
WhileChinesecarcompaniestodaydonotleadthedevelopmentofpropulsiontechnology,theysimplydon'tneedtoatthistime.Considerthatabout45%ofChina’s$588billionUSDstimulusplanistobeinvestedinprojectsrelatedtodevelopingChina’sinfrastructure.Replacinginternalcombustionengineswithothertechnologies‐suchashybridelectric,fullelectric,hydrogenpoweredvehiclesorcleandiesel‐requirescollaborationbetweenbusinessandgovernmenttodeveloptheinfrastructureintandemwithdevelopmentofthetechnology.Theeconomicsoftheproductitselfandultimatemarketacceptanceisverymuchdependentontheavailabilityoftheinfrastructuretorechargeorreplenishthefuel.It’snotrealistictoexpectacompanytoreinventthetechnologicalunderpinningsoftheautomobileunlessthereisaconcurrentdevelopmentandinvestmentintheinfrastructuretosupportthatnewtechnologyvehicle.Thisisespeciallytrueintoday’sweakenedglobaleconomy.
Asthelargestautomotivemarket,andbecausetheChinagovernmenthasthecapacity
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andwillingnesstoinvestintheinfrastructureforalternativepropulsion,thetechnologywilleventuallycometothemarket.Whenitdoes,theChinesecarcompanieswillbegintoclosethegaprelativetotheindustryleaders.Whatmakesthedevelopmentofalternativepropulsiontechnologyparticularlychallengingisnotsimplythevehicleitself‐buttheneedforinventionoftheinfrastructurefordeliveringrenewablesourcesofelectricityandinstallationofbatterycharging/replacementstations.Asthelargestcarmarket,andtheplacewiththelargestneedforalternativeenergysolutions,wecanexpecttoseeChinaplaceaheavyemphasisondevelopmentoftheelectricvehicle(EV)infrastructure.Thecountrythatleadsthedevelopmentofthisinfrastructurewillundoubtedlyleadinattractingtheinvestmentindevelopmentofthetechnologiesthatplugintothatinfrastructure.
Consumeracceptanceofnewenergyvehiclesisyetanotherchallenge.Whilethe
infrastructureinvestmentsalreadydescribedwillhelptipthescalesinfavorofnewenergyvehicles,consumersmustalsobeconvincedthatthepriceandperformanceofthenewenergyvehiclecaninfactmeettheirexpectations.Asanationalpriority,wecanexpecttheChinagovernmenttohelpbyofferingincentivesfortheretailconsumertopurchasenewenergyvehicles.Chineseconsumershavelessexperiencewithgasoline‐poweredcars,andarealreadyaccustomedtoshortdistance,low‐speedcommuting–conditionsveryfavorableforelectriccars.
TheChinagovernment’swillingnesstoinvestintheinfrastructuretosupportalternative
propulsiontechnologywillultimatelyhelpdrivedemandsidemarketacceptance.ThisiswhereChinahastheopportunitytotakethelead,andthatwilldrivesupplysideinvestmentinnewtechnology.ForthedevelopmentofNEVs,theinfrastructuremustcomefirst‐andthiswilldrivesupply‐sideinnovation.Ittakesacombinationofbusinessandgovernmentworkingtogethertomakesuchatransformationalchangepossible–andnowhereintheworldisthereacloserlinkbetweenbusinessandgovernmentthaninChina.UnliketherecentUSgovernmentinterventionthatisoccurringwithnopreconceivednotionofthe"endgame"–China’spolicymakershaveformanyyearsbeencraftingthedevelopmentplansfortheautoindustry.Theseplansaresurelynotperfect‐butsuchplanscomeinhandywhennavigatingacrisis.
ReshapingtheAutomotiveBusinessModel
Anunprecedentedrestructuringoftheglobalautomotiveindustryisunderway.SeveralOEMsandsuppliershave filed forChapter11bankruptcyprotection,andare in theprocessofrestructuring and selling assets in order to regain a profitable footing. However, it would bemisleadingtolaytheblameforthefailureofthesebusinessesontheglobaleconomiccrisis.Asdescribed by this author in General Motors: The Fall of An American Icon, “the recent globaleconomiccrisishasacceleratedtheneed forrestructuring throughbankruptcy”. The failureofautomotive companies is the consequence of not transforming the 20th‐century industrialparadigmtoa21stcenturyglobalenvironment.Itwasneveraquestionofwhetherthedominantautogiantsof the20th centuryauto industrywould fail,butwhen theywould fail. Theglobalfinancialcrisismerelyexposedthefatalflawsthatwerealreadypresentintheindustry.
Thepainfulrealityofglobalizationisthatitisnotastraightforwardprocess.Inordertobecomeglobal,mostautomotiveOEMshaveattemptedtoexportabusinessmodeloptimizedfortheirhomemarkettotheirinternationallocations.Migratingdevelopmentcapacitiestomarketsthatlackthecompetencytoperformtheworkmissestheentirepointofglobalization.Worse,theblindpursuit of cost efficiencyhas resulted inmanyOEMs and first‐tier suppliers outsourcingcritical competencies that are necessary for differentiating the company’s products. Pursuingcheappartsorcheaplaborisultimatelyself‐defeatingwhendoingsorobsanorganizationofitscore competencies. Similarly, exporting a business model designed for the home market toforeignmarketsonlyservestolimittheabilityoftheorganizationtoembracethecapabilitiesoftheforeignmarket.
Automotivemanufacturers in concertwith their key stakeholdersmust redefine theirbusinessmodels for the new reality of 21st century competition. Going global is not a simpletransplantofthecurrentbusinessmodeltoaforeignlocation.Itimpliesatransformationoftheentire automotive value chain to leverage the opportunities made possible by globalizedcapabilities.Itinvolvesredesigningbusinessprocessesacrossthevaluechaininordertodeliver
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tothecustomerabrandwitharelevantUniqueSellingProposition(USP).Thiswillrequirethat21st century global auto companies fundamentally rethink their entire value chain from theconsumerbackthroughsalesandservice,production,supplyandR&D.Keystakeholdergroups,including the national governments with an interest in the global competitiveness of theirdomesticautoindustry,mustcontributetothisdevelopment.
China’sRevolutionaryRole:TheCatalystforTransformation
WhilemanymayquestionwhetherChinacantakealeadershiproleinthetransformationoftheglobalautoindustry,onecannotdenytheinfluencethatChinahashadonrecentdevelopments.ThesheersizeandgrowthoftheChinamarkethasforcedmostcompaniestoreprioritizetheircapitalplansandresourceallocation.ThereallocationofproductionandsupplyresourcestoChinahasfundamentallychangedthecoststructureoftheindustry–whichchangestheentirecompetitivepricinggame.China’sincreasingthirstforenergyhascreatedmuchpricevolatilityintheenergyandresourcesector,whichhasadirectimpactonconsumerbuyingbehavior.China’sgovernmentpoliciesandcentrallyplannedeconomyhavesupportedthecreationoftheinfrastructureneededtostimulateboththesupplyanddemandsideoftheautobusiness.
Acatalystisdefinedas“apersonorthingthatprecipitatesanevent”.ThisisanappropriatecharacterizationofChina’sroleinthetransformationoftheglobalautoindustry.Inaglobalizedworld,wewilllikelyfindthatthetransformationoftheautomotivebusinessmodelmaynotbelinkedtoanyonecompanyorcountry.Instead,successful21stcenturycompanieswillbetheonesthatcanquicklyadapttotherealityofglobalization.Oneofthebestnon‐automotiveexamplesisAppleCorporation,acompanythathascarefullydeployedabusinessmodelthatyieldsinnovativeproductswhileleveragingthebestandmostcosteffectivecapabilitiesfromhomeandabroad.Whilemanyautocompaniescouldarguethattheyareglobal,thisfundamentalApple‐stylerethinkoftheentirevaluechainhasreallynotoccurredintheautomotivecontext.
The emergence of China as the largest automobilemarket in the world is a significanteventonlyinthesensethatitcausestheentireworldtotakenoticeofjusthowfastthiseconomyis developing – and to also understand precisely how China is transforming the global autoindustry.Ratherthantryinginvaintoturntheclockbacktothewaythingsusedtobe,itwouldbewisetolearnhowtousethesetransformationalforcestodefineabusinessmodeltoleveragethecapabilitieswhichglobalizationmakespossible.
Note:
ThisisthethirdandfinalinstallmentinaseriesaboutthedevelopmentsoccurringintheChineseautomotiveindustry.
ABOUTTHEAUTHOR
BillRussoistheFounderandPresidentofSynergisticsLimited,aChina‐basedconsultancy
focusedonbuildingsuccessfulcross‐borderpartnerships.Hehasover25yearsexperiencein
operations,strategy,businessdevelopment,andM&Aroles.Billisasought‐afteropinionleader,
havingrecentlyappearedonCBSNewsandChinaRadioInternational.Hehasbeenquoted
numeroustimesinsuchjournalsasNewsweek,theWallStreetJournal,theWashingtonTimes,
StraitsTimesaswellasNationalPublicRadio.Heisalsoaguestautoindustrycolumnistforthe
popularChinesenewspaperSouthernWeekly.Hisworkinstrengtheningoperational
transparencyhasbeenfeaturedinleadingbusinessjournals(HarvardBusinessReview,
Controllingmagazine).
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Contact:
http://www.synergisticsltd.com
http://synergisticsltd.blogspot.com
http://twitter.com/Synergistics
http://www.linkedin.com/in/williamrusso
