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  • Количество слайдов: 38

Note that I skipped many slides in my class presentation. Feel free to ask Note that I skipped many slides in my class presentation. Feel free to ask followup questions at: [email protected] edu If you are not using a W&L account, it could get trapped in the new spam filter -- I always acknowledge emails quickly, so if you don't hear from me, send it from another account! China and Autos decentralization and competition in an exploding market Spring 2007, Shanghai Washington & Lee University Study Abroad Trip © Michael Smitka 2007

Two tasks • Teach you more about China • Prepare you to ask a Two tasks • Teach you more about China • Prepare you to ask a real expert good questions (Alyssa Webb) (Maybe teach a little economics, too) © Michael Smitka 2007

Projections, June 2004 Pw. C Autofacts © Michael Smitka 2007 Projections, June 2004 Pw. C Autofacts © Michael Smitka 2007

Reality, 2006 surpassed 2011 projections © Michael Smitka 2007 Reality, 2006 surpassed 2011 projections © Michael Smitka 2007

US China India Japan Mexico Korea Russia Germany Brazil France UK © Michael Smitka US China India Japan Mexico Korea Russia Germany Brazil France UK © Michael Smitka 2007 Italy

Political economy + Industrial Organization • Early auto industry: ford's position – Monopoly! • Political economy + Industrial Organization • Early auto industry: ford's position – Monopoly! • Then GM, Chrysler – Oligopoly • Now Toyota, Honda, Nissan – And imports, all with multiple models • Monopolistic competition – Zero (economic) profits, excess capacity, high distribution costs (advertising, inventory) – Choice is costly… © Michael Smitka 2007

So how about China? • What do you see on the road in Shanghai? So how about China? • What do you see on the road in Shanghai? – When you got into a taxi, what make was it? • A VW Santana, right? • So how many car producers under Mao? – Initial single Soviet plant in Manchuria ca. 1958 • But then decentralization – Entering modern period = • 119 firms! • Each part of a local monopoly © Michael Smitka 2007

Excess entry • Initially one Soviet plant in Manchuria – Based on a Fiat Excess entry • Initially one Soviet plant in Manchuria – Based on a Fiat plant – But also regional military plants from late 1940 s • But extreme decentralization under Mao – "3 rd Front" policy put production in remote areas in case Russia invaded • Party rewarded output – Industry counted (but not quality!) • services didn't • agriculture was grain first © Michael Smitka 2007

All 30 -odd provinces had plants • Trucks of course were primary – But All 30 -odd provinces had plants • Trucks of course were primary – But also cars – Motorcycles, motorbikes – Various tractor-like 2 -, 3 - and 4 -wheelers • How was that possible – Look at Shanghai's roads: • VW Santana still large share – Look at Beijing's roads • Even though it is the #1 vehicle in China • You'll see almost no VW Santanas! © Michael Smitka 2007

Political Success from output • Not efficiency! • Local protectionism – Huge employment levels Political Success from output • Not efficiency! • Local protectionism – Huge employment levels in the aggregate • By that measure, China is #1 in world • Productivity began improving in the 1990 s – But still pressure to buy local • And military / government demand too – Plus not (yet) at international efficiency levels – Big jump since 2000 • Economies of scale -- more later © Michael Smitka 2007

So how many firms now? • No good count! But … in all likelihood So how many firms now? • No good count! But … in all likelihood more! – So 120+ firms • Why no exit? – Growth allows all to survive • For now…! With help by local governments and banks – Compare that to the US market entering WWI, smaller than China's market yet dozens of firms – Role of suppliers: assemblers, well, assemble! • And market • And (sometimes!) design • Contrary to central government policy! – Which has long and unsuccessfully pushed consolidation © Michael Smitka 2007

However… • A few success stories developing – VW but lots of Buicks in However… • A few success stories developing – VW but lots of Buicks in Shanghai – Guangdong significantly richer • Honda and Nissan and now Toyota – 4 domestics stand out • Chery, Brilliance, Geely, SAIC • Three delta regions (my sense) – Pearl River (south), Yangtze (mid), Yellow (north) – Sichuan as a potential 4 th region • But everyone else trying, Anhui doing well! © Michael Smitka 2007

Market structure shifting • Trucks and luxury vehicles at start – Chauffeured vehicles • Market structure shifting • Trucks and luxury vehicles at start – Chauffeured vehicles • Now mid-sized a big share, plus minivans etc (especially corporate use) • New segment: compacts at $7000 -$10, 000 – Still a luxury, but lots of rich Chinese • Sales are now greater so do China's middle/upper class families outnumber Japan's population!? • regional producers with small, cheap vehicles • Also inexpensive © Michael Smitka 2007

Market remains fragmented © Michael Smitka 2007 Market remains fragmented © Michael Smitka 2007

Region x segment • Fragmented market! - only 2 firms have a double-digit share Region x segment • Fragmented market! - only 2 firms have a double-digit share • 20 non-Chinese firms • 29 substantial Chinese firms • 49 firms total! – 14 have sales over 100, 000 units – 6 have sales over 250, 000 • VW, GM, Honda, Chery, Hyundai, Toyota – 1 has sales over 500, 000: VW exit, yes, but still new entry © Michael Smitka 2007

© Michael Smitka 2007 © Michael Smitka 2007

Some adjustment already • No longer does everything sell – Obscene initial monopoly prices Some adjustment already • No longer does everything sell – Obscene initial monopoly prices gone – Profit margins were 30%!! • Now prices down 20% for many models • VW as representative monopolist – No new models – Indifferent quality – Slow to respond when market changed • But in general capacity constraints • Which won't last forever © Michael Smitka 2007

Sustainable? • Some exit over time • Some already … Fiat venture up for Sustainable? • Some exit over time • Some already … Fiat venture up for sale? • M&A strategy (maybe) to consolidate regionals? • 6. 15 million units in 2006 and growing • US at 16 -17 million still much larger • But Germany Japan France all smaller • Fragmentation! • New models at roughly 1 per week – But still less than US with 650 models? • Yet industry benefits from economies of scale • So a contradiction? © Michael Smitka 2007

Many will survive • Fierce competition, will be surprising successes – For now hard Many will survive • Fierce competition, will be surprising successes – For now hard to fail, will have many producers • Compare to Big Six in US, plus Little Six, plus imports – Some will end up in bad niches / mismanage JVs • Much will hinge on government policy – Environment! – Auto industry an easy political target everywhere • Unique strategies echoing 1910 s in US © Michael Smitka 2007

Assembly is not all • Everwhere… – Parts employment at least 2 x assembly Assembly is not all • Everwhere… – Parts employment at least 2 x assembly • Assemblers assemble – Parts producers make – Parts producers engineer – Parts producers enjoy economies of scale • Outside China, Magna may adopt same – Looking to buy Chrysler! © Michael Smitka 2007

Parts production • Key to the industry – All the major players are here Parts production • Key to the industry – All the major players are here • 75 of top 100 global firms • 1, 200 foreign and joint-venture plants total! – Can have 100% subsidiaries, unlike assembly – Delphi has 500+ engineers – More than some car assemblers! • Experience & capacity growing rapidly © Michael Smitka 2007

Industrial geography • Asia needs parts producing capacity – Duh, Chinese market up 20+% Industrial geography • Asia needs parts producing capacity – Duh, Chinese market up 20+% in Q 1 of 2007 • India, ASEAN (Assoc Southeast Asian Nations) growing too • You have to add capacity somewhere! • Implicit rule of thumb: • Assemble where you sell, make parts nearby • But a long transition to accomplish that! • China not low cost for labor intensive parts! • Nor is it always low cost against existing plants – But it beats a new plant in Japan or Korea! – Not to mention Germany and © Michael Smitka 2007

Other ancillary industries • In aggregate 3 x manufacturing – Repairs and service • Other ancillary industries • In aggregate 3 x manufacturing – Repairs and service • A big segment – – old & poor quality vehicles Hard use on rough roads NO info … but maybe you can find some? Yellow Hat of Japan seeking to enter? – Dealers • Largely ignorant about those in China – But will meet Infiniti people – Lots of consultants, professional marketing • Dealerships can be a real estate play, too © Michael Smitka 2007

Policies • Lots of imports at different points in time (Kia!), but now small Policies • Lots of imports at different points in time (Kia!), but now small share of market (250, 000) • Strong pressure for joint ventures – Constant tensions • Some Chinese firms have multiple subsidiaries – More than one foreign partner – Ambitions to launch vehicles on their own • Barriers (perceived & real) encouraged entry Probably too successful for own good © Michael Smitka 2007

Autos and Energy • Energy demand rising at +2. 3% per year – Hence Autos and Energy • Energy demand rising at +2. 3% per year – Hence doubles in 30 years – No growth 1996 -2000 ["rule of 72"] • Why so low? – After all, GDP growth is huge! • 7%-11% implies economy doubles in – ≈ 10 years at 7% – < 7 years at 11% – Old rule of thumb: elasticity ≥ 1. 0 © Michael Smitka 2007 ["elasticity"=? ]

Nature of energy demand • Less heavy industry – New firms use higher quality Nature of energy demand • Less heavy industry – New firms use higher quality energy sources • Less crude sources by households & others • More urban – more energy efficient than rural – But (duh!) more autos • So weight of petroleum up – China now a net importer • 1979 exports ==> big push development strategy failed • Cf. perestroika in USSR … parallels & contrasts © Michael Smitka 2007

Why poor link? • Legacy of planned economy – Prices are administered – Starting Why poor link? • Legacy of planned economy – Prices are administered – Starting efficiency levels abysmal • 80% poor quality coal in 1980 – Still 56% • Electricity, petroleum – 13% and 24% respectively © Michael Smitka 2007

Now transition over? • Initial economic reforms (as in USSR) premised on energy exports Now transition over? • Initial economic reforms (as in USSR) premised on energy exports – Petroleum and coal • Former never panned out, now latter nil • So net importer – Petroleum up 15% to 20% pa – Small share of world total at 3. 5% • But with low growth elsewhere, large share of incremental demand © Michael Smitka 2007

How will change? • Better quality coal – will be source for electricity • How will change? • Better quality coal – will be source for electricity • Motor vehicles petroleum for next 2 decades – Electric vehicles in urban, low-distance areas • Fits China? ! – Hydrogen a long ways away? • But no existing gasoline infrastructure so sensible? • Government policies can push easier than in US / EU – Hybrids not viable • Silly to put 2 power plants and battery in a small vehicle © Michael Smitka 2007

Autos and Pollution • 16 of world's 20 most polluted cities – SO 2, Autos and Pollution • 16 of world's 20 most polluted cities – SO 2, NO 2 , CO, ozone, PM (particulate matter) • In a short breath, smog – Est. 590, 000 excess deaths a year! • Tianjin health impact 3. 7% GDP (US$1. 1 bil) – Even though pollution cut by 10+% • Source 50 -80% from motor vehicles – Additional congestion time losses • Only recent switch to unleaded fuel – Additional hidden costs from brain damage © Michael Smitka 2007

Energy: sum • Motor vehicles will account for about – 60% of demand in Energy: sum • Motor vehicles will account for about – 60% of demand in 2020 – Improving efficiency even 1% has impact! – Easy political target © Michael Smitka 2007

Big push for electric cars • Good for within-city transport • Uses night-time generating Big push for electric cars • Good for within-city transport • Uses night-time generating capacity – Peak load is daytime – So electricity providers have huge strategic & management challenge that this helps • Technically feasible in short-run • But government also favors hybrids – Maybe irrationally so © Michael Smitka 2007

Is it good policy? • Maybe … shifts location of emissions away from urban Is it good policy? • Maybe … shifts location of emissions away from urban areas – Key for smog, as in LA (electric plants downwind in NV) – Maybe not be lower overall emissions • depending on details • Electricity can potentially be cleaner • May not save energy or cut CO 2 • Lots of waste across entire electricity chain • But electric engines pretty efficient • Batteries an issue; government can mandate © Michael Smitka 2007

Political salience • Consumers Political salience • Consumers "understand" cars – Not technical electric power grid issues • Few producers so administratively easy – Though China stretches the definition of "few" more than anyone! • Also licenses etc make policy easier to implement – Autos are a sexy industry – Sex is OK in politics – but fouls up decision making (a polite 4 -letter "f" word) © Michael Smitka 2007

Lessons? 1 of 2 • Legacy of extreme decentralization – Interesting strategy issues • Lessons? 1 of 2 • Legacy of extreme decentralization – Interesting strategy issues • Entry game with lots of players – long-run reality of monopolistic competition – Until then, really profitable - for some • Extreme competition – Survivors may have unusual skills and strategies • 35% of GM's advertising is for internet chat rooms © Michael Smitka 2007

Lessons? 2 of 2 • Political economy – Auto industry everywhere politicized – At Lessons? 2 of 2 • Political economy – Auto industry everywhere politicized – At least in post-WWII era • Lots of externalities but • Direct auto policies not always best – Biggest sector (parts!) escapes attention • Sheer diversity makes regulation hard © Michael Smitka 2007

Conclusion • Transport as a positive externality – Without transport, markets can't function – Conclusion • Transport as a positive externality – Without transport, markets can't function – Motor vehicles offer flexibility trains don't • Without transport, poverty – Poor rural residents vastly outnumber urban poor • Transport is ONE element of development – A necessary (but not sufficient) component • Assignment – judge the infrastructure you encounter • Vehicles (making selling servicing) isn't the issue! © Michael Smitka 2007

© Michael Smitka 2007 © Michael Smitka 2007




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