Driving Economic Growth: Behind the Wheel of the Chinese Auto Industry

by Joe

Easier Access for US Auto Makers

A year ago, April, China’s National Development and Reform Commission announced a lifting of the caps on foreign investment in the nation’s auto industry.   The country will remove limits on companies making full electric and plug-in hybrid vehicles in 2018, commercial-vehicle companies in 2020 and the wider passenger vehicle market by 2022, China’s state planner said in a statement.  Additionally, Chinese officials have indicated that tariffs on imported vehicles could be significantly reduced from the current 25% this year.  The Chinese auto market has emerged the largest in the world, with over 28 million vehicles sold in 2017.

 

This topic is a bit of a two-edged sword for US Auto manufacturers and the US economy.  While China’s auto industry grew 13.7% versus the prior year in 2016, in 2017 growth slowed to just 3% over prior year sales.  So, as restricted access to China’s auto-market is noticeably improved, the opportunity is not what it was a short time ago.  Additionally, China continues to eye the US auto market with eagerness.

 

Historically, the US has not been an easy market for China.  Product quality issues, failure to meet tough U.S. safety standards, lack of consumer awareness and ill-conceived import partnerships have combined to limit China’s success.  This has led Yin Tongyue, President of Chery Automobile Company (another major Chinese auto manufacturer) to have said “Entering the U.S. market is like swimming in water that is too deep. We are scared of drowning,” in an interview with a Reuters reporter. “We need more time to prepare. U.S. technology and U.S. consumer habits are too different.”

The Chinese believe that this is that time.  In a recent interview, another Chinese auto industry executive, President Chinei Yu of GAC Motor (one of Chinese leading auto firms) said “We are well prepared to face the challenges in the U.S. market.”

Understanding the Chinese Market Place

A few questions that occur to us as we review this topic.

  • Why is China apparently giving more preference to electric vehicle manufacturers?
  • If US car companies are to succeed in China, what do the need to know about the Chinese market?
  • Since Chinese auto companies are largely unknown to American car buyers, who are the most likely to succeed?

This first issue is perhaps the easiest answered.  China’s economy is state controlled.  Air pollution is one of the most significant domestic issues that China must overcome.  Incentives and mandates issued from Beijing and local governments, including polluted mega-cities such as Shanghai, have boosted electric vehicle growth.  China is looking to leaders in the electric vehicle industry for answers and American corporations like Tesla have taken an important lead in this area.  The Chinese market is ready and hungry for electric vehicles and companies who take advantage, whether it be from easier entry of US produced products through lower tariffs, or products made in Chinese-American plants will satisfy that demand.  In fact, electrified vehicle sales expanded 53% in 2017, to 777,000 vehicles including 652,000 all-electric vehicles and 125,000 plug-in hybrids. (Source: the China Assn. of Automobile Manufacturers)

While competition in China is tough and getting tougher, there is demand for American brands and the perception of American quality.  This is borne out in the following table.  In all but two instances, Chinese manufacturers are producing American/ Western brands for their domestic market.

Chinese Auto Buyer Product Preferences

Recent Consumer Trends

Sedans have declined in popularity whereas SUVs and MPV (Multi-Purpose Vehicle) remain in higher demand.

As stated previously, new energy automobiles have become popular.

Rising interest in ‘intelligent’ cars (auto-pilot features etc.).   Its predicted that intelligent cars, defined as an integration of environmental perception, programmed decision-making and auxiliary driving functions via a modern sensor, remote control, and artificial intelligence system, will realize the connection of automotive and intelligent mobile phones in 2017.  In China, cyber security is viewed as the biggest problem related to these vehicles.

Consumers Preference

The majority of Chinese car buyers are younger than 35 years old and compose more than up 57% of all car consumers.  This segment is focused on brand image/ prestige and is attracted by intangible features like appearance and performance.  It is believed that these features increase the owner’s projected status. These factors are driving the growth in the mid-priced and luxury segments.

 Emissions Are a Primary Focus

The Chinese car universe is not governed by the whims of buyers, the way Americans’ evolving tastes have pushed car companies to leap into increasingly bulbous crossovers. Facing a crisis of congestion and air pollution—and desiring an industrial advantage in building electric cars—President Xi Jinping and his transportation ministers are enforcing a quota on Chinese automakers that 10 percent of car sales be EVs and plug-in hybrids by 2019. That number is expected to increase to 25 percent by 2025—which means multiples of millions of EVs.

 

Word 4 Asia has an exceptional understanding of the major factors in China today.  If your organization is seeking to further its objectives in China, we’d like to talk with you.  Our wide network on the Chinese mainland stands ready to work with you.  Reach out to us today at gene@word4asia.com

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Belt and Road: Weighing the Risks and Choosing the Right Path

by Joe

Belt and Road:  Weighing the Risks and Choosing the Right Path

In Word4Asia’s March, 2018 blog, we presented an overview of China’s Belt and Road initiative.   We ended with an optimistic note stating that it’s China’s ability to look past political and economic differences between themselves and potential partnering nations that will ultimately define the success of this tremendous initiative.

This month, we continue our BRI discussion to include topics related to potential involvement by foreign (non-Chinese) firms.  These include risk identification, market related issues, risk mitigation and various methods of participating.

UNDERSTAND THE RISKS

As in any business opportunity, potential gains must always be measured along with attendant risks, and there are many potential risks associated with Belt and Road.

  • Geopolitical risk: Because BRI projects will span across many territories and nations, they are subject to changes in political regimes and bilateral relations.
  • Funding risk: BRI projects are high-costs, requiring significant loans to debtor nations.  Each of these nations have a varied ability to pay back these loans.
  • Operational risks: BRI projects will involve many different businesses and institutions.  Skill sets and competencies will vary among all these stakeholders and these differences open projects to completion delays and cost overruns.

CHOOSE THE BEST PATH

Conduct a commercial viability assessment prior to committing to any BRI project.   Such a study will include reviewing the maturity of the supporting ecosystem and confirming that the project complements the company’s other similar projects.  It includes completing a robust business case that firmly establishes sufficient market demand and a competitive situation that will allow the firm to achieve its profit objectives.

  • Confirm the maturity of the region’s infrastructure: Include the following issues in your analysis:
  • Will the firm’s investment be protected through stability in economic policies within the host nation(s)?
  • Does the region’s infrastructure include the stable, multi-modal distribution of supplies?
  • Are there sufficient supporting facilities in the region? These could include commercial banks, telecommunications systems, basic water and sanitation facilities etc.
  • Is the project under consideration a good fit for firm at this time? For example, should a company with one risky project in Kazakhstan undertake a concurrent, similar project in the same region?

RISK MITIGATION

Exit plans:  Along with having a clear-eyed view of the possible risks involved in a potential BRI project, the firm should also outline a clear exit strategy from the start of the project.

Local Authority alignment:  Cultivating strong, positive and respected relationships with local authorities is essential.

Trusted Partnerships:    Partnerships with companies having prior experience of working with the local government are critical in B&R projects.  Relationships with local companies can provide  insight into how things get done, assure sensitivities to unspoken realities will ensure that key individuals are included in planning and execution.  Failure in this area could easily cause avoidable delays and expenses and, in some cases, even derail projects.

MARKET ENTRY OPTIONS

There are at least six ways foreign companies can participate in BRI.

Investors:  Commercial banks are being invited to participate.  Companies can invest in bankable infrastructure projects, either by co-investing with Chinese players or by investing in partnership with existing Chinese instruments, such as the Silk Road Fund. The Chinese government has thus been seeking foreign investment, in part through its infrastructure bonds.

Suppliers:  Companies can supply advanced construction equipment, machinery, and cutting-edge solutions for infrastructure projects.

Consultants:  Firms with expertise in large-scale infrastructure projects could partner with firms from China by sharing their experiences in designing and developing infrastructure in less developed countries. Consulting can also open paths through Chinese companies to the Chinese domestic market.  Similar opportunities are also open to consultants working in international project management.

Management:  As operators of new facilities and managers of the newly constructed infrastructure,  Chinese company leaders are interested in management experience, especially within emerging economies.  A company can bring its operational experience in managing effectively, profitably, and sustainably to new settings.

 

Word 4 Asia is a consulting firm with a unique focus on China.  If your goals are leading you East, we’d like to talk with you.  Our experience, skills and expansive network may plan a pivotal part in your success!  Contact us at gene@word4asia.com

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The Re-Birth of the Spice Road

by Joe

“The world needs China, as all humans are living in a community with a shared future … That creates broad strategic room for our efforts to uphold peace and development and gain an advantage.”

— Communist Party “manifesto” on China’s role in the world

Belt and Road

It’s been nearly five years since China first laid out their vision for achieving “peace and cooperation, openness and inclusiveness, mutual learning and mutual benefit” under the guiding light of their stupendous Belt and Road initiative.   But what is “Belt and Road”?

One way of understanding Belt and Road is to envision the world – especially Eurasia and Oceania – as a massive wheel with sea, road, rail, pipeline acting as spokes to the outside and Beijing serving as the hub.  Belt and Road may be understood as China’s leadership and capital orchestrating the construction of a massive, multi-national zone of economic and political influence.  68 nations have been included in these plans.

The scope of Belt and Road will take your breath.  When completed, the land-based portion of Belt and Road will travel West from China, through Kyrgyzstan, Uzbekistan, Tajikistan, Iran, Turkey, Istanbul, Russia, Poland, Czech Republic, Germany, Netherlands and Spain.  A maritime path ventures Southwest from China to Vietnam, Singapore, Jakarta, Kuala Lumpur, India, Sri Lanka, Pakistan, Kenya, Djibouti, Egypt, Greece and Italy.  These nations include 69% of the world’s population and 51% of global domestic product. (Oxford Economics)

Examples of BRI Road and Rail Initiatives

Chinese-Thai high speed railway

The Chinese-Thai high speed railway line began in December 2017.  The full line will be 542 miles long, with trains reaching speeds of over 150 miles per hour. Meanwhile Malaysia, given funding as part of BRI, will unveil four major rail projects in 2018.

Moscow-Kazan high-speed railway

One example of projects now underway is the Moscow-Kazan high-speed railway.  This project is slated to begin construction in the current year at a cost of $22.4 Billion and is a centerpiece in Russia’s plans to improve connectivity across its massive nation.  The rail line will connect Moscow with Russia’s third largest city, topping out at 350 km per hour (210 mph) and shrinking the current rail-transit time from 14 hours to just 3.5 hours.  Eventually, the Mosco-Kazan line may extend all the way to Beijing.

The Yamal liquefied natural gas plant

In December 2017, Russia launched the Yamal gas plant in Arctic Siberia, a region rich in hydrocarbon reserves.

Construction of the project was led by China’s China National Petroleum Corporation, one of the largest integrated energy groups in the world with headquarters in Beijing.   Start-up costs exceeded $27 Billion.

 

  

Port Expansion

In addition to the expansion of rail and roadways, the maritime portion of BRI includes expansion of China’s presence in ports along the old Silk Road.  Two well-funded Chinese mega-corporations, Cosco Shipping Ports and China Merchants Port Holdings, have been actively purchasing cargo terminals in the Indian Ocean, the Mediterranean Sea, and the Atlantic rim. Most recently, Cosco achieved their first bridgehead in northwestern Europe by purchasing Belgium’s second largest port, the terminal in Zeebrugge.  That deal followed a raft of other acquisitions in Spain, Italy, and Greece in just the last couple of years. Chinese state firms, which once kept close to their home market, now control about one-tenth of all European port capacity.  These ports underpin the maritime half of the Belt and Road Initiative, winding from the South China Sea across the Indian Ocean, through the Suez Canal and into Europe.

 

Advantages of BRI to China

The investment required to accomplish Belt and Road is astounding; projected costs exceed $1 Trillion.   According to Baker McKenzie and Silk Road Associates, this massive investment will accomplish a few strategic priorities, including:

  • Acceleration of the internationalization of Chinese firms, and creation of world class multinationals and supply-chains.
  • Increasing Chinese exports to the nations included in the Belt Road Initiative (BRI).
  • Increase the competitiveness of Chinese firms on an international basis.
  • Strengthen China’s economic and political role in BRI regions, including Europe.
  • Strengthen the renminbi’s exchange rate on the global market.
  • Improve China’s ability to export industrial products internationally. China has vast excess capacity in cement, steel and other metals.
  • Creation of new markets for Chinese firms such as high-speed rail firms.
  • Quell the volatility within central Asian countries through economic improvement, and thereby generate more stability within China’s own ‘trouble spots’ such as Xinjiang and Tibet.

 

China’s Role in Funding BRI

In 2014, China became a net capital exporter for the first time, with outward direct investment (ODI) surpassing inward direct investment. It is also now the world’s sixth largest provider of foreign aid, according to the Japan International Cooperation Agency’s latest estimate. (Economy Watch, May 2015).    The cost of completing Belt and Road will exceed $1 Trillion, an immense ambition and objective.  In China’s nascent position as lead capital exporter, they have committed to spending roughly $150 Billion a year in the 68 countries that have signed on to these initiatives.  China is positioned to win big – both economically and politically.

 

Belt and Road also factors to increase China’s political clout among BRI nations through debt holdings.  As explained by Scott Morris, Deputy Assistant Secretary, Development Finance, U.S. Treasury from 2009 to 2012, “The rules of the road are really that whoever holds the most debt is going to be calling the shots”.

Two examples explain his point.  For example, consider Kyrgyzstan’s debt from infrastructure projects.  Debt levels and dependence on China are projected to rise from 62% of gross domestic product to 78% during BRI.  At the same time, China’s share of that debt will jump from 37% to 71%.   In a similar way, China’s share of debt in Djibouti will rise from 82% to 91% of GDP as a result of infrastructure funding.  Until now, China’s presence there has been limited to a single overseas military base.  As said by Neil Davidson, a senior analyst for ports and terminals at a maritime consultancy, Drewry Shipping Consultants, Ltd., “At bottom, there is a geopolitical underpinning to a lot of this.”  While Mr. Davidson’s statement was chiefly associated with the port aspects of BRI, the point is easily expanded in this broader way.

While China clearly stands to acquire significant advantages through BRI, President Xi enumerated five principal advantages available to all participants in the initiative; policy coordination, facilities connectivity, unimpeded trade, financial connectivity and people-to-people bonds.

 

Why China’s Belt and Road Will Succeed

China’s ability to negotiate with all players is also the single greatest factor why the BRI will ultimately succeed.  China’s commitment to this project is greater than a “with us or against us” type of foreign policy.  In China’s view, government formation of political bonds with select blocs of countries standing in opposition to other countries is “outdated geopolitical maneuvering”.  Instead, China is forging partnerships of dialogue that emphasize friendship, not alliance.  Hence, we are witnessing China’s constructive relationships with Israel and Iran, Azerbaijan and Armenia, Russia and Ukraine, Pakistan and (ultimately) India, North Korea and the U.S. — crossing all lines and treading all paths in between.

Since their relationships are bilateral, each country or bloc negotiates on their own terms, and deals can be made without the usual ‘politics to complicate business agreements.

Word4Asia is a unique consulting firm serving the unique communication needs of North American organizations with interests in China.  As such, we have expertise in Chinese business, communication, and culture.  If your objectives include a presence in China, we’d be happy to talk with you.  You can reach Word4Asia at gene@word4asia.com.

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The Do’s and Don’ts of Gift Giving in Chinese Culture

by Joe


In Western culture, the Holidays are a traditional time of gift exchanges as we mark the occasion and share friendship and love.  Found in cultures all over the world, it’s as if the custom was coded in our DNA.  Every culture has certain customs, rituals and beliefs that accompany gifting.  For instance, at this time of year, many people celebrate the arrival of the Magi in Bethlehem and the gifts they gave to the newborn infant, Jesus.

With a culture as old as China’s, you can be certain that there is depth to the rituals, customs and even taboos that accompany gift giving.  As an outsider to their culture, Westerners should be careful to properly acknowledge and follow the Chinese customs in order to achieve the desired effect.

Let’s review some of the “do’s and don’ts” of exchanging gifts with native Chinese friends and colleagues.

 

 DO'SDON'TS
When gifting Chinese children with money tucked away in red envelopes (Chinese New Year), be sure to reflect their age in the amount given. More money should be given to older siblings and less to the younger ones. A gift to an older child or teenager should be enough for the child to buy a T-shirt or DVD.Don’t go “over the top” when giving a gift. It’s important not to potentially embarrass the Chinese if they are unable to reciprocate at the same level.
When giving money inside a red envelope, always use new, crisp bills. Folded or dirty, wrinkled bills are in bad taste.

Be aware of the symbolism the Chinese recognize in sound-alike words and avoid making social faux pas. For instance, avoid anything with a four in it. The Chinese word for “four”, 四 (sì) sounds like the word 死 (sǐ, death).
If you’re an expat manager supervising a Chinese team in China, limit year-end bonuses to the equivalent of one month’s pay.Never wrap gifts in white paper or with a white bow. It’s better to use colors like red, which represents “luck”. Pink and yellow are associated with happiness and gold evokes thoughts of wealth and fortune. White, on the other hand, is a funeral color, associated with death.
If you are going to give a gift in a group setting, be certain that the recipient is the most senior person in attendance. Don’t give a gift to a single person if that person is in a group and you cannot offer everyone else a gift, too.
As with giving business cards, always hand the gift to the person with both hands. This is a sign of respect because the gift is considered an extension of the person. When receiving a gift, also accept it with both hands and say thank you.

Never give a clock as a gift. Traditional superstitions regard this as counting the seconds to the recipient's death
When gifting several people in a situation where hierarchy is relevant, such as a company setting, be sure to reflect the difference in status in what is being given to each person.Never give a man a green hat. The Chinese saying "wearing a green hat" means someone's wife is unfaithful.

With today’s regulations and the anti-corruption campaign best not to give money or an overly expensive gift to any government official.


 

To wrap things up, Word 4 Asia sincerely thanks all the wonderful people in our network for for the gift of your friendship and support  in 2017.  We look forward to what lies ahead!

Sincerely,

 

Gene Wood

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Driving Economic Growth: Behind the Wheel of the Chinese Auto Industry

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