What's driving the auto sector?
Updated: 2013-02-22 08:43
By Andrew Thomson (China Daily)
The answer, for now and in the future, could be China and its rapidly developing consumers
China holds the No 1 spot in the world for investment in the auto sector, according to consulting group KPMG's 2013 survey, which provides industry insights from 200 leaders across the global automotive sector.
The 14th KPMG Global Automotive Executive survey shows that China is way ahead of Brazil, Russia, India and South Africa, its BRICS counterparts, in not only being an investment destination, but also a true global manufacturing force and an exciting arena for the development of unique and interesting consumer trends.
This year's survey suggests that one area in particular has undergone a significant change in attitude from respondents: e-mobility. While fuel efficiency remains a key concern for consumers, positive sentiment for the fully electric car has diminished, with more attention now being paid to hybrid vehicles. The reason for this is straightforward: the cost of purely electric vehicles is extremely high, due largely in part to the price of the lithium-ion batteries currently used.
Last year, in Japan, one-fifth of all new vehicles on the road were hybrids, showing that fuel efficiency and a reduction of consumers' costs continue to outweigh environmental concerns. In China, there is also now more focus on improving the ICE (Internal Combustion Engine) as well as developing hybrid cars, largely due to a lack of consumer acceptance for e-vehicles and the relatively poor recharging infrastructure currently in place.
But industry leaders have not just reprioritized e-vehicles and the refinement of the ICE. New, albeit expensive, materials such as carbon fiber, titanium, magnesium and innovative plastics will all help to reduce weight and increase fuel efficiency.
Some 80 percent of the survey's respondents think that these materials will be in general use within the next decade. Japanese respondents are more bullish, with 92 percent believing that this milestone will be achieved in just three to four years. This may be an indicator to how Japan sees its competitive future and a wake-up call to automakers in China and other countries.
One interesting consumer trend in China - which seems to fly in the face of government policy incentives supporting the sale of cars with engines of 1.5 liters or less, as well as concerns relating to the environment - is the rising middle class' desire for bigger, more luxurious cars, in particular SUVs. According to the China Association of Automotive Manufacturers, sales of SUVs increased by 26 percent in 2012 to 2 million units.
This is a dramatic rise, especially when compared with the overall vehicle sales growth of 4.3 percent last year and passenger vehicle growth of 7.1 percent. It appears that China's aspirational middle class loves to "go big or go home", and a Chinese friend of mine summed this up when he said: "Ten years ago, I used to drive a VW Jetta in Beijing and I was somebody. Now I have to drive a much bigger and better car to keep that status."
In fact, KPMG's survey confirms this trend across BRICS, with 86 percent of respondents agreeing that comfort is now a vital factor in consumers' expectations, and that basic models are no longer wanted. But is this just an anomaly in the maturing BRICS markets?
In South Korea, manufacturer Hyundai has made record profits over the past 12 months, entering the "virtuous circle" of automotive manufacturers (which includes the likes of BMW and other high-end brands) by increasing prices and reducing customer discounts.
As Seung Hoon-wi of KPMG in South Korea points out: "At a time when many manufacturers are struggling, Hyundai's margins rocketed from 4.1 percent in 2006 to an astonishing 11.4 percent in the first half of 2012, with sales hitting a record high in 2011." These figures clearly demonstrate that Hyundai has sought to increase its brand value, making it a serious competitor to its European and North American counterparts, as well as driving a change in perception of the styling and quality of Asian-built vehicles.
There is a growing opinion among participants in this year's survey, that vehicle dealerships will be required to adapt and change rapidly and significantly in line with a range of issues and trends, including the global economic downturn and changing consumer behaviors. For example, 83 percent of auto executives from North America feel that having an online presence is vital for dealers and intermediaries, and that original equipment manufacturers will begin to seek more dominance as brand custodians, following the example set by consumer giants such as Nike and Apple, with flagship stores in major cities.
In China and the Asia Pacific, there is the more conservative view that traditional dealership models will continue to dominate, with the main focus being on incentives and pricing rather than on online marketing, presence and location.
However, KPMG's view is that smart dealers and OEMs in China will get ahead of their competitors by embracing next-generation models of retailing and exploring the opportunities presented by social media, better customer relationship management and the development of new business areas such as vehicle leasing and rental.
In China's automotive sector, as in nearly every area of business in China, buying behaviors and consumer tastes are developing rapidly, and we are at a stage now where car buyers not only have more experience, they also might be looking to change their existing vehicles. The used car market in China is growing quickly, a claim supported by the 2.7 million used vehicles sold in 2012; a 15 percent year-on-year increase according to the China Automobile Dealers Association.
This offers an opportunity to OEMs and dealers alike. Pragmatic consumers in China may show that they are just as concerned with financial prudence in austere times as those from other markets. Players such as VW, with the planned introduction of its DasWelt Auto used car scheme in 2014, are showing significant interest in the used car market.
What is really prevalent in this year's KPMG survey is a continuing shift of the automotive center of gravity toward the Asia Pacific. The majority of respondents were of the view that sales and production in Europe will continue to decrease in the wake of the economic downturn, but that sales and production will continue to rise in China and the other emerging markets.
In fact, the majority of those asked believed that the BRICS nations will have a 50 percent share of global sales by 2018. As China's economy continues to grow and consumer habits change, there will also be an inexorable drift toward mergers and acquisitions in future strategies. We therefore expect that automotive manufacturers across the globe will continue to consider China as their top choice for investment, for now and in the future.
The author is Asia Pacific head of automotive and a partner at KPMG China. The views do not necessarily reflect those of China Daily.
(China Daily 02/22/2013 page9)