The Chinese Question: Threat or Opportunity?

China is a much more complex market, with more paradoxes, than many would have you believe.

That was the message to attendees of the Automotive Industries Association of Canada’s 9th Annual After-market Forum, “The Asian Syndrome,” held in Toronto in early December.

While there is certainly a significant opportunity for automotive companies, from both a manufacturing and sales perspective, this does not mean it is without risks, says Frank Ordonez, president, Delphi Product & Service Solutions.

“It is certainly true that the world’s manufacturing footprint is changing, with an estimated 9.7% growth in [Chinese manufacturing in] the first half of this year, and exports increasing rapidly.” More than half of the growth of the Fortune 500 companies is expected to come from China, he adds, with Canadian exports to China growing by nearly half in the first nine months of 2004.

“It is no secret that in the last 10 years China has made an amazing transformation. I remember the days when we first moved into China,” says Ordonez, adding that now the company has a number of significant operations there including joint ventures, partnerships and research and development. The company has invested hundreds of millions of dollars, and with good justification.

“Last year, China surpassed Germany as the world’s third largest vehicle producer.”

China represents more than a quarter of the growth in the world’s automotive assembly, says Ryan Robinson, of the Autofacts group of PriceWaterhouseCoopers.

The fact that China is forecast to add more than three million units of assembly over the next few years lends further weight to the argument that we should all be talking about China, says Robinson.

“Both in terms of the risks that are posed by doing business in China and also some of the risks that it imposes from a global point of view,” he says, China needs to be looked at more closely to get a true understanding of the country’s dynamics.

China is often seen as a powerhouse marketplace of a billion and a half people, but there are really two Chinese realities, and the country has a more complex set of challenges of its own, says Robinson.

There is eastern China, with its onrush of economic activity. A whole host of assembly plants have developed in the eastern coastal regions over the past few years. It is in these areas where the large urban centres and most of the economic industrial activity is.

In western China, there is only one assembly venture by Ford, in the Chung King region. This is a land-locked, isolated region with an economic base heavily dependent on agriculture. So, even though China appears to be gaining ground industrially, there are huge portions of the country stuck firmly in an agrarian economy, with a consequent lack of buying power.

“A lot of initial press said there are 1.3 billion people, ergo there is a huge opportunity. But you have to start paring that down to what the actual addressable population is.

“The top two tiers of the population, some 482 million, are urban dwellers, but there are people who have an annual household income of just over $1,000. So when you talk about the threshold [to own a vehicle], you have it at just over $5,000.

“You end up with an addressable market of some 60 million people, which is still a huge market, but it is definitely not 1.3 billion people whom you are addressing with new automotive products and the ability to service those products.

“At the end of 2003, there were 12.4 million privately owned vehicles in China, up 25% from 2002, or some 10 vehicles per 1,000 people–a far cry from mature markets, though in Beijing it is estimated that 35% of households now privately own a vehicle.”

This is just one of the many transformations taking place in China, and may be secondary to the rise of more recognizable names in terms of the Asian effect on the North American aftermarket, at least in the short run.

“Many people are speculating that Toyota may pass GM in this decade. It is estimated that The Big Three may lose third place by the end of the decade. It is anticipated that the Asian OEMs will control 42% of the global market by 2009.

“Manufacturers and distributors alike are affected by these changes. It affects all Canadian distributors. It affects technicians. It affects everybody who is a part of this marketplace.”

Still China remains front and centre in people’s minds, and in the presentations at the Forum. But in some respects, the transformation of China may be neither as widespread nor as deeply rooted as it may seem from the outside.

“The market is in what I call survival of the fittest. There is no established distribution, no cataloguing, none of what we have become used to in this country. But it is becoming more organized. Prices will begin to trend upward.” Also, he says, counterfeiting will decline as manufacturing becomes more established. This was the experience in Japan and Korea, he says.

A case in point is the Long Fung Company retail chain. Think of a chain on the order of Canadian Tire, with bright showrooms and ambitious plans to have as many as 1,000 stores open by 2007, and you will understand where the market wants to go. But look behind a store, and you will see where it has to come from–what Ordonez calls a “parts city.”

“Parts are everywhere,” says Ordonez. “Technicians come on their bicycles and their scooters and they rummage through and say, ‘I think I need one of those.’ I’m not sure if I ever saw a catalogue.”

Still, says Ordonez, the opportunities cannot be ignored.

“We believe the opportunities in China are enormous. We believe that in order to better serve the market in North America and in Europe, we need to be in China.”

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Focus On Domestics Has Kept Aftermarket In The Dark

The traditional aftermarket is facing challenges from the import sector that, in many ways, it is not aware of due to its dependence on domestic applications, says researcher Dennis DesRosiers.

Factors on a number of fronts have masked the growing influence of import nameplates on both the vehicle sales market as well as the replacement parts market.

Currently, some 43% of new vehicle sales in the Canadian market are of import nameplates. DesRosiers expects that this will likely settle out to about 60% in the years to come, largely dominated by Japanese nameplates. This is in contrast to modest beginnings.

“When Toyota first went to enter the Canadian market [in the early 1960s], they could not convince any car dealers to become Toyota dealers. So, they went to B.C. and Quebec, which were most amenable to selling the Japanese brand. They went to corner garages and got them to put two or three cars out front,” says DesRosiers.

Since those early dealers, for Toyota and other brands, come from the repair sector, they are more aware of opportunities that exist in the independent sector.

“Many if not most import dealers come out of the aftermarket experience. It was their roots or their grandfathers’. They don’t just go after the repairs in terms of fixing vehicles. They are also very good at supplying parts into the marketplace.”

Since they have been so good at that for so long, the traditional aftermarket may not be fully aware of the penetration of import service.

“The typical Big Three dealer is not that proactive at wholesaling in the market, whereas import nameplate dealers, led by Honda, actively wholesale parts in the market. That is a core business function. They will price competitively, they will have the parts, and they will knock on doors,” he says.

There are many implications to the rise in import vehicles, including SKU proliferation, channel shift implications, different technology that leads to training issues, the fact that the low maintenance needs of imports hurts demand, and there is the absolute imperative for fit, form and function of the parts being supplied.

“So they are catching the consumer on one end through bays, and they are catching consumers who don’t go through their bays. There are very significant wholesale operations at dealers.

“A typical Big Three dealer believes that if he supplies parts into the aftermarket, it is going to cost him customers in the bays. The point is that they have already lost the customer.”

The largely ineffective efforts of the domestic nameplate dealers in selling parts to the independent service provider has helped mask its shrinking share of those nameplates from a service standpoint.

Another aspect is the predominance of domestic nameplates in the light commercial vehicle segment.

“If you pull the commercial vehicle number out, the 57% share of vehicles on the road turns into the mid-40s. There is a big commercial bias to the Big Three. They are very high maintenance vehicles–typically 60-to-75,000 km a year. The aftermarket dollars tend to be quite substantial. The Big Three aren’t going away in terms of their importance to the aftermarket in this segment.”

This has enabled “an awful lot of people in the aftermarket” to ignore the shift in import nameplates at the consumer level.