“Automobile Industry” and

“Macro-economy” in China

By Linzhe Li, Yurui Lai,

Bingchun Gan.

PURPOSE AND AGENDA

In ancient time, Asia is the core of the world, including its economic power. Especially in agriculture and manufacturing and military, Asian contributed a lot to the world progress. However, after 16th century, colonization made Asian economy suffer and national industries lagged behinds.

Ancient Asian Economy

Song dynastyThe neo-Confucianism:

Zhu Xi, 朱熹宋明理学He inherited Neo-

Confucianism from Han Yu, and Li Ao in Tang Dynasty, and then developed it well in Song Dynasty.

Plus: invention----techniques----ancient

technology

Today’s main powers

REAL GDP GROWTH RATE IN 2011

Why do we choose auto industry?

As one of the pillar industries, automobile can be regarded as the second expensive thing to buy after real estate. (a representative of macro-economy in some sense)

Auto is a very complicated product with resources, techs and so on, so the input & output coefficient is quite high.It would have higher contribution than other normal industry.

Incomplete and brief table of input & output coefficient

(产业链关联指标 )

Different country with

different storyThe economy is highly-advanced. Residents in Japan are enjoying developed life quality.

In Japanese domestic economy, service industry accounts the largest status than other 2.

5.00%29.50%

63.40%

Industries accountabil-ity

primary industry Secondary industryservice industry

Implication: technologies cast

own power The industry proportion shows matured industrial

economic growth model.

Japanese automobiles dominate world market with the US and Germany.

technology = power to bring high quality

competition in.

Japanese automobile industry contains various technologies like engine, gearbox, cooling system.

Example: these 3 auto giants won’t have high class competition if they have no own technologies to support.

South Korea implication

The economy of Korea started to take off since 1960s. After 1997 Asian financial crisis, the growth rate decreased to middle level and maintains 5 -6%.

Exports and domestic consumption both played heavy role in Korean growth. Especially domestic demand for automobile, Hyndai Mortor, Kia Motor, Daewoo, and Ssangyong

together stand for over 90% of market.

The culture to advocate for national brands is highly regarded.

To Chinese automobile industry, we ask 2 main questions.

First, do Chinese automobile companies make “own cars”? If no, how can Chinese vehicle have more independent technology?

Second, are Chinese willing to buy own brands car? If no, how can the industry change it?

The issue we are worrying

Supply side:

lack of own technology cannot support domestic brands to develop high quality competition and then benefit economy.

Demand side:

Chinese domestic consumers want to have cars, but not home brands. It means no stimulus.

The no.1 automobile

market

The demand and supply

Facts: By national statistics, in 2011, the total sale

in China was 18505100, and there were about 18418900 automobiles manufactured in 2011.

Although the growth rate of last year was below 3 percent throughout 13 years, the market accountability ranks number one in the world.

Implications:

Now with the increase of Chinese consumers’ purchasing power, more and more Chinese people are going to purchase private cars. Especially in urban life , having own transportation tool is becoming necessary.

As we know: Y=C+I+G (with

out EX and IM)I=Y-C-G

I=SSO S=(Y-G)-C

C is relatively low, even though comparing with the high speed of per capita GDP growth.

Statistical information

Good saving habits give huge potential to this

consumption

Good saving habits give huge potential to this

consumption

However….

The auto expense are not spent on domestic car

makers

But, the independent brands are not benefiting from the huge demand and supply.

In brands classification, there are independent Chinese local brands, German brands, American brands, Japanese brands, and Korean brands mainly. On the other hand, in the nature of company, there are independent brands corp., joint venture and pure foreign import cars.

Independent brands, Japanese German American

To use Toyota as an example

The Japan Automobile Manufacturers Association has data complete as of the end of 2004 that shows Toyota has 35% of the entire Japanese auto market. And this doesn’t include the market share its majority-owned subsidiaries control.

SO, COMPARE TO CHINESE ALL DOMESTIC BRANDS TOGETHER ACCOUNT EVEN LESS THAN 30%.

2011 ratio of auto sales share

in Chinese MKT

35%

61%

4%

Sales

independent brandsjoint venturepure import

The willing of Chinese consumer

Two issues waited to be solve

From supply side:

????Why don’t we have

technology????

Pure Chinese capital

Although own brands are expanding, some core technologies are

not mastered. The shortage restricts us to develop high-class and

high quality autos. First example:

High-horsepower engines(大马力引擎 ):

Second example:

The gearbox(变速箱 ) Aisin aw, Zf and Jatco

1. Capital input The capital being put into R&D was only about 1.1% in

GDP in 2001. To compare with USA and Japan, they are 2.79% and 2.92% respectively.

Time matter: Considering the lag from time, Chinese R&D has already lagged behind.

Inadequate capital investment in the

Chinese government on the

automotive industry

In recent years, the development of Chinese industrial enterprises is

particularly obvious, especially on scientific and technological innovation

activities. But there are still a low proportion of investment,

staff shortages and the irrational structure of

government investment to support scientific and

technological activities to the enterprise.

Enterprise side

The enterprise technology spending of government funds accounted for only 3.7%.

For example, Jianghuai Automobile makes ships as well cars. So what we see is out of concentration and long-term strategic plan.

2. Education---- especially for

blue-collar Bad condition for

vocational students

Lack of regulation lead to many unqualified engineer school .

People tend to look down upon students who learn vocational skills. ( compare to German blue-collar)

Romer-Mankiew-Weil Model

Y = A Ka Hb L1- -a b

if Y is the output of Auto industry in China.

H would be the education level of particular vocational talents.

3.policy, the way to acqure techlonogy

The story of “Market exchange technology ”.

to built Joint venture and acquire technology in this way

CAPITAL EXCHANGE TECHNOLOGY

CHINESE CAPITAL BUY OUT THE FOREIGN CORPORATE.

Further example Blind producing

No absorbing the core techonlogy

“Selling Cars to Rural Area” policy

Increasing sales with lower price or old for new service

Completely rely on the policy

4.From the perspective of

law

frequent IP infringement

Simply copy the design of other foreign car makers

Copy the core technology rather than developing its own technology

BYD coupé Mercedes Benz- CLK

Shuanghuang nobleSmart for two

Question???? for you

do you know any Chinese auto brands?

Would you like to buy own car or foreign car honestly?

From demand side:

what’s the psychological tendency of favoring

foreign-based autos. The culture of buying famous foreign brands auto:

the weak side of culture:

vanity

Pure

import

Joint venture make

High demand on foreign

car People who have the willing and ability to cars, often

tend to choose foreign brands.

Besides owning a foreign based car makes consumer feel classy, consumers trust the quality and reputation.

Conclusion: own brands are not sufficiently supported and favored.

The repair rate of autos

Independent brands, European, Korean, American, Japanese

Low demand for domestic

car Higher frequency to get repaired than foreign-based

and imported manufacturing.

The popularity and credibility of domestic auto brands are not fully accepted in Chinese MKT.

Conclusion: domestic customers don’t trust home-based automobiles.

The “SUCCESS” of joint-venture model

Weak Price advantage Joint ventures manufacturer account the biggest

part of MKT, still about 60% till 2011, which dominates price.

Before China joined WTO, there are 120% tariff on whole auto import.

Joint venture manufacturers brought parts of car into China with very low tariff, and then assemble in China with mature techs by economy of scale.

WHAT WE ARE REALLY TRYING

TO SAY: Automobile industry is only one corner of this

phenomenon.

To reflect the whole economy, the growth model, especially manufacturing side, are generally under this kind of unsustainable circulation.

Therefore, if China can not master own technologies and techniques and have support from domestic market, the growth today won’t be sustainable in the future.

The “smiling” curve

The common example---- Apple

inc. in China Supply:

Apply design products from GROUND-UP, and master own high-techs to support itself development.

contrast

In mobile phone MKT, currently there Android, Symbian, Windows Mobile, and Apple IOS as operational systems. But there haven't been any competitive Chinese effective independent system supporter.

demand:

Iphone maniac are everywhere in Chinese mobile phone MKT.

Also android phone, Sony Ericsson and Nokia stand solidly.

Chinese customers don’t like to support domestic brands, because of lagged usage and lack of popularity.

In addition: from competitors view

The most popular PC operational system

Microsoft Windows is the most popular system used in Chinese normal customers, which stimulates the fast development of Chinese computer MKT.

But, because of popularity, there are a number of pirate version of it.

However, Microsoft never took authentically severe penalty to Chinese MKT,

the popular pirate version always keep the domestic development at low level

The truth:

We are facing problems and obstacles from aspects.

How can be solved?

In general

For government Policy should have right direction, so as to avoid

impulsive doing in policy making and regulations.

Government could aim longer benefit in core value, instead of just caring about GDP growth. We believe there should be a balance.

Legislate strict law for IP protection

For enterprise From Max Webber, we need more Protestantism

style of manufacturers. (meaning: doing real productive work with capital)

No copy from others design, we may learn, but we eventually want own ground-up product.

Concentrating on long-term development, never being restricted by little benefit in front of eyes.

Customer need to support

domestic product It’s interacting. Only if the product progressed, customers will accept.

We agree what Jackie Chan said: “every time I attend ceremony, I wear Chinese traditional costume. If each Chinese who prefer foreign garments would like to spend a little bit on Chinese-based clothing, the Chinese domestic clothing industry will catch up the world-class.”

At last, 3 aspects work

together

This is how we believe Chinese economic revolution to go.

Question for the future

Background:

There are some policies now that it should support new techs car, like electric cars, but at the condition of lacking core technologies, will this be a real good idea?

If you are policy maker, under this situation, would you spend capital doing core tech development or new tech development?

References: http://www.360doc.com/content/06/0302/21/1656_74731.shtml

http://auto.163.com/special/eight/

http://auto.ce.cn/xwzx/201203/15/t20120315_21132255.shtml

http://www.cnauto.com.cn/zhishi/qc50dq.htm

http://wenda.tianya.cn/wenda/thread?tid=699976ab6d21c380

http://seekingalpha.com/article/5610-toyota-dominates-japans-domestic-auto-market-market-share-ranking-tm-nsany-hmc-dcx

http://www.bis.org/publ/work312.pdf

http://www.ritholtz.com/blog/2009/05/china-consumer-spending-vs-savings/

http://east_west_dialogue.tripod.com/id1.html

http://news.163.com/12/0314/21/7SJA8N2300014AEE.html

http://www.wilsoncenter.org/sites/default/files/2-feature_1.pdf

Thank you for your attention

Question?