After auto sales in China lost its growth momentum, the relations between stakeholders in the auto industry have become more intense. Only when they become equal partners can the growth engine restart.
Recently I visited a sales head of a joint-venture automaker. Naturally we talked about the continuously declining sales in the first half of this year. He sought my professional opinion on this topic because he couldn't find an answer through all perspectives, including quality, design, word-of-mouth, employees' work rate and the arrival of new generations of consumers.
He was very confused, and I tried in vain to persuade him that this issue should be reviewed from a higher strategic level, rather than day-to-day practical aspects. So I wrote this article to share my point of view.
To be sure, the sagging China auto market is the natural outcome of the longstanding unequal relations between different stakeholders in China's auto industry. To the disappointment of the abovementioned sales head, improved car quality, better design, upgraded configurations and outstanding reputation couldn't stop the sliding of the overall auto industry. It is the longstanding unequal relations among stakeholders in this industry - those between foreign brands and joint ventures, between automakers and dealers, between traditional automakers and Internet companies - that have emerged as the stumbling blocks. Only when these relations become more balanced can the auto market's growth engine restart.
Foreign brands and joint ventures
Compared with other markets, even after filtering out the taxation element, auto prices in China are significantly higher. Foreign brands earn lucrative profits from China through patent transferring and licensing, designated equipment procurement, brand merchandizing, and costs of foreign staff. Many listed foreign brands worked very hard to include their Chinese ventures' performances into their financial reports because with those staggering numbers, their financial results appear much more attractive.
However, foreign brands often leave very little amount of money in China to support the businesses' local growth. They appear more interested in reaping the money from China rather than building up a great local auto maker.
Automakers and dealers
Through setting high prices for complete cars and spare parts, automakers managed to lock in their profits - they will always remain profitable, sometimes with extremely high margins. When the market is undersupplied, dealers have the opportunity to mark up the retail price even higher. But when the market is oversupplied, the dealers are left high and dry in cut-throat competitions to sell cars. No matter which brands fail in China, the losses will be mostly shouldered by the dealers and automakers can escape unscathed. Some auto brands might be "generous enough" to hand out subsidies, but towards the end of the day, it's always auto brands making the calls and dealers are at a very weak position.
Traditional automakers and Internet companies
The relation between traditional automakers and Internet companies paints an even more complicated picture. Automakers used to be the center of the auto industry chain, but after Internet companies burst into the scene, the dot com giants brought in brand new management concepts, business models, even with their ecosystems. Confronting these "barbarians at the gate", most automakers opted to clinch their money bags closer to their chests and refused to share anything with Internet companies.
As the industry evolves, both camps' paths will inevitably cross because they share many destinations, such as Internet of cars, smart vehicles, database marketing and cloud computing. A battle is looming on the horizon. Interestingly enough, during the battle, the trickle of talents leaving automakers to join Internet camp keeps growing bigger. It seems the automakers are doomed to fail.
Unequal relations always hurt the enthusiasm of one side. The current pattern, though having existed for a long time, has significantly prevented the sustainable growth of China's auto industry. The sagging sales in the first half is not caused by insufficient fundamental demand, rather it is because not every stakeholder's interest has been properly taken care of. This is the time for major players to sit down to have the hard talks and no one can keep pretending not seeing the elephant in the room. Only with a more balanced structure can China's auto market return to growing path and move onto the next level from the current scale of 20 million units per year.