SHANGHAI: China's auto industry is growing up, but the enormous
profit margins of yesteryear may be gone forever, said a group
of CEOs and industry watchers at the 10th CEO roundtable, with
the theme "Auto China," organized by China Daily in
Instead, the Chinese auto market of the future will take more
of its profits from derivatives, like financing and post-sale
products, than directly from production.
"Market growth over the years will continue slightly ahead
of GDP growth," said Dr. Christoph Stark, Honorary Chairman
of the roundtable and President and CEO of the BMW Group in
China. However, "the one thing we all agree upon... is
that those days of high profits, for the time being, are over."
"I see generally the trends of a maturing market,"
said Stark. "I think the market will become more similar
to... markets in other parts of the world."
"Everybody still sees (China) as the most attractive market
and nobody wants to miss out," Stark said. "Everybody
is holding on for the China magic to come back."
But the magic, while not altogether gone, is fading and the
industry, instead of racing forward with its pedal to the floor
is proceeding at a slower, but steadier, speed.
The tide of mergers and acquisitions, price fluctuations, new
models and new companies is likely to continue for a while though.
Long term prospects
"Has the Chinese bubble burst? Our view is that the bubble
is a long way from bursting in the next five to ten years. We
have quite a bullish view in the longer term," said Paul
Gao, a partner at consultants McKinsey and Company China.
However, the huge profit margins of 2002 and 2003 have probably
gone for good, Gao said.
Three main factors are likely to determine the future growth
of the auto industry: Deregulation, infrastructure and consolidation.
These are likely be affected by other factors, such as environmental
protection and China's huge employment needs, which may pose
a challenge to the immediate growth prospects of both Chinese
and foreign manufacturers.
"It's a hot topic in China right now. Perhaps the hottest
topic," said Stark. "To my mind one word keeps coming
up and that's change."
If one wanted to describe the Chinese auto market with a single
word, then fluidity might best fit the bill.
According to Stark, change is the mainstay of the market, both
in growth rates and market share.
"We have an almost dramatic increase in new companies
and new models. Anyone who has been to the Shanghai Auto Show
can see that," he said. The Shanghai Auto Show ends today
and has brought together just about every auto manufacturer
in the world. "I think now we have the largest number of
manufacturers in China worldwide."
Stephanie Koenig of Internationaler Messeund Ausstellungsd
GMBH, organizer of the Auto Shanghai 2005 Show, agrees,"
For the first time we've seen major global brands coming in
as groups. We've seen a lot of new technologies, products and
concepts displayed at this A level show."
At the same time, local companies are following the Korean
model of developing local and foreign markets simultaneously.
However, one of the challenges for automakers may well be developing
new business models that combine both growth and profitability.
"Mass market brands in other markets have done a very
good job in destroying shareholder value, by achieving growth
without profitability," said Gao.
"The question for many of them is what are they doing
differently in China to ensure they are achieving profitable
growth. Unfortunately, most of these companies are not doing
He said a quantum leap is needed in the industry, like the
two during the last century that caused shifts in the auto market
The first, Gao said, was the development of mass production
by Henry Ford. The second was Toyota's innovative production
system, which ensured reliability and elevated Japanese auto
makers to the world stage.
"Unless (Chinese manufacturers) can figure out the third
revolution in the auto industry... they will never be able to
catch up," Gao said. "They don't have the required
capacity to play the same game."
Foreign automakers also face different challenges in coming
years. With many having already established a foothold in the
country, the next step will be establishing steady growth.
Ashvin Chotai, director of Asian automotive industry research
at Global Insight, warned though, that the double-digit growth
of two and three years ago is gone forever.
"The question now is... when will profits converge with
the very low margins we have seen in the global industry,"
However, others still look at the Chinese market and see dollar
"Everybody is talking about stagnation and about reduction
of profits and growth, but nobody is talking about the last
month of March when we produced more vehicles in China than
ever before," said Dr. Peter Kilgenstein, executive vice-president
at Bosch (China) Investment Ltd.
The future of the auto industry in China may very well depend
on the central government, its approach to deregulation and
how it balances the many issues it faces - such as local employment
needs, the economy and market openness.
"You have an industry that is regulated by government
policy to a large extent," said Stark.
Both a push for exports and integration into the world market
will continue to affect domestic development.
Also, new government regulations on issues like local contents,
service networks and used car policy, will have a great impact
on market development," Stark said.
At the same time, as the market matures profits may decline
while risks increase.
That, said Gao, may be a factor in the government's approach
to the auto industry. To date, the government has encouraged
the growth of multinationals, but it has also shared in the
"Moving forward, there's going to be less profit to be
shared and there's going to be more risk," Gao said.
In the future, said Stark, Chinese auto manufacturing may be
focused on one or two top manufacturers.
Freeman Shen, President of BorgWarner China, believes that
while industry consolidation is inevitable, some local companies
are actually adapting quite different market development strategies,
such as targeting the mid size market in Germany and the rest
of Europe, instead of following what the Koreans and Japanese
"I believe money is not the issue," Stark said. "I
believe that the central government will try to weed out all
the small companies which operate at a local level.
Regardless of the issues, Kenneth McCall, chief executive officer
of TNT China, said prospects for the future are bullish. However,
there are major challenges in the automobile industry supply
chain; for example, OEMs for the time being are not sharing
networks or resources and as such it is extremely difficult
to rationalize the supply chain. There are also marked differences
in policy and its execution between provincial and municipal
"It will happen. We think it will be the second largest
market in the world," said McCall. "We need to concentrate
on building infrastructure and building up the aftermarket."
As the market matures, the fragmentation that characterizes
the Chinese auto industry is likely to come to an end.
"You have huge capacity on one hand and on the other,
you have a hugely fragmented industry." Stark said.
The future of the industry may well hinge on how this issue
is dealt with.
"We have a 50 per cent cap in joint ventures... how long
can they keep this restriction in foreign ownership of assets?"
asked Chotai . That may get in the way of consolidating the
market, which is now full of many different brands.
The question, said Stark, is whether the government will find
new employment for people who lose their jobs as the market
Rationalizing the market may ensure better profits but it may
prove difficult to remove local partners, who have been in the
supply chain for decades.
"Here there are one, two or three layers of additional
structures that you have to build into the supply chain,"
Traffic and infrastructure
Infrastructure and traffic development are also likely to affect
the growth of the auto industry. The key issue may be how to
introduce millions of cars into already overcrowded cities.
"The whole of China will be one big parking lot... this
is not a sustainable scenario," said Richard Lee, chairman
of Ferrari Maserati Cars International Trading, who is selling
'dream cars' for the select few.
"Are we talking about people commuting to work every day
in their car... The whole exercise will be about transportation
for the Chinese people.
"I think it's no good for us to think about building 10
million cars a year and jamming them onto the highways of China.
I don't think it's economically feasible or ecologically feasible."
As more cars are produced, more environmental fears surface.
More cars also create new regulations aimed at cutting down
damage to the environment.
One of those regulations, which comes into effect July 1, sets
limits on fuel consumption.
"I am concerned," said Ferrari's Lee, whose cars
would not pass the new regulations. Neither would some other
luxury cars, like some of BMW's bigger models.
"The fuel consumption issue is quite serious," said
Zhang Jianwei, of the China Automotive Technology and Research
There are some big question marks to be answered.
Among them, said Stark, are clean energy regulations, as well
as the introduction of diesel fuel into the market.
"The question is not whether, but when diesel will be
introduced more widely," said Kilgenstein, of Bosch.
"No one believed 20 years ago that the level of emissions
today would be practical," he said. Engineers are working
on lower emission levels and "I believe there is change
ahead of us."
Eberhard Schrempf, President and CEO of BMW Brilliance, concurs
that environmental issues will be a major concern for the industry,
particularly as the Beijing 2008 Olympics is approaching. "You
don't want to see the same complaints people lodged at the Mexico
Olympics in 1968." He said.
Ultimately, said Joel Epstein, CEO of AIG Consumer Finance
Group, making cars is one thing but mechanisms have to be put
in place to allow people to buy them.
Soon, like in the more mature western markets, money may be
made through financing car purchases rather than manufacturing
"When will the barriers in the financial and insurance
industry come down, so that they can grow and support the growth
of output?" he asked.
He said there are three problems.
One is the organization of Chinese financiers, which look at
geographical areas rather than products to separate departments.
"It's one big pot of rice for all the different programs
offered by the banks and they don't know how much they are making
on each different product," Epstein said.
A second issue is the lack of consumer information or credit
bureaus, although the Bank of China is moving rapidly in that
"I believe within a few years we will have decent consumer
information, which is the glue that holds together consumer
A third issue is the legal environment around registration,
portfolios and protecting lender's rights.
"As those barriers come down, it will be much easier for
people to finance buying a car," he said. "But I think
those things are happening."
Ultimately, said Stark, more questions than answers were raised
at the roundtable, which brought together 31 CEOs and senior
executives from the entire automobile industry.
"More talks with governments, industry players, consumers
and other stakeholders, will be required to sort out those strategic
issues, like this CEO roundtable organized by China Daily."
It was the 10th such event and the first held in China's financial
centre. Previous round tables have been held in Beijing and
Yesterday's event coincided both with the Auto Show, which
ends today, and with China Daily's move to improve coverage
The newspaper recently set up a news centre in the city which,
according to Deputy Editor-in-Chief Huang Qing, brings some
of the newspapers top reporters to Shanghai to expand coverage.