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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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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Word4Asia Shares Comments By US Treasury Secretary, Steve Mnuchin at Recent LA World Affairs Council

by Joe

Gene Wood is an Ambassador member of the Los Angeles Affairs Council.  This position gives Word 4 Asia numerous informative opportunities each year.  When these are consistent with our China/ Asia business objectives, we will be happy to share what we learn with you, our esteemed colleagues.

 

On February 26, Dr. Wood participated in a ‘meet and greet’ affair at the Four Seasons, Beverly Wilshire which was then followed by a luncheon attended by special guest, US Treasury Secretary, Steven Mnuchin.

 

LAWAC President, Terry McCarthy, handled the interview with class.  In my conversation with Mr. McCarthy, he asked me what question I would ask of Mr. Mnuchin. I suggested “What precisely would need to occur before the US administration would label China as a currency manipulator?”  He smiled but shook his head negatively.

 

A few interesting comments made by Secretary Mnuchin follow:

  • “The relationship between top leaders in China and the USA have never been better. Mr Trump and Mr. Xi talk regularly on the phone.”
  • “My previous positions gave me experience in finance, banking and business but nothing prepared me for sanctions. Sanctions are one of the most powerful tools we have in international relationships. We have implemented over 250 sanctions again North Korea…and they are working.”
  • “We will demand changes which assure fair and balanced trade with China.”
  • “When I came into this office I was forced to cross this country. New York and Los Angeles do not represent the rest of the United States.”

US Treasury Secretary, Steve Mnuchin and LAWAC President, Terry McCarthy

A standing room only crowd attended the recent LAWAC luncheon with special dignitary, Steve Mnuchin.

Among other notablels, Crooner, Pat Boone was also in attendance.

Word4Asia invests inordinate hours reading, interviewing and listening to the opinions and thoughts within China.  In order for Word 4 Asia to remain a critical bridge between the United States and China, continuing education in all issues related to the discourse between our two nations.

In addition to the opportunity of hearing Mr. Mnuchin’s unique insights on the US economy, Dr. Wood also had the opportunity to meet with other event notables, including Morton Wengler and Tom Shipiro (and wives).  In addition, Gene had the opportunity to meet Mr. Pat Boone who can still make white suits look cool!

 

 

 

 

 

 

 

 

 

 

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Chinese Sports Reveal Historic Strengths and Economic Aspirations

by Joe

Over the last two weeks, many of the world’s sports fans have been marveling at the talents and aspirations of some of the greatest athletes alive today. The Winter Olympics have just ended in South Korea leaving many people with great memories, and a few people with life time achievements that will be recorded in sports annals for posterity.

I love the Olympics! They speak to some of the best of our dreams about ourselves and what a few of us can aspire to, and they represent what the world could be if we were able to move past the politics and geographies that separate us. They emphasize what can be achieved, instead of stressing what is wrong with the current conditions.
Since Word 4 Asia celebrates China and provides people with a keener understanding of this world power, we thought it would be appropriate to focus on Chinese sports this month.

Chinese Sports Rooted in History

China’s athletics heritage is rooted in the histories of their varied cultures. It is inevitable that with such a long history China should have developed several unique and traditional sports and pastimes. While some are practiced widely by the Han minority as well as the minority groups who make up these groups and reflect their own cultures. As the country is so large and the various minorities are separated by vast distances it is not surprising that they have their own special ways in which to express their vigor and enthusiasm.
Almost all the traditional sports were derived from productive activity. The Mongolians, Tibetans and Kazaks inhabit vast natural grasslands and horsemanship is vital to their existence. Consequently, their gift for riding and shooting has given rise to their forms of sport. The people who live in agricultural communities or who rely on hunting for their livelihood are good at climbing, wrestling, jumping, shooting and so on. The Chinese have practiced archery and swordplay as well as a form of soccer dating back to the earliest dynasties.

Some of China’s traditional or regional sports include:
• Jianzi — players aim to keep an shuttlecock type object (called a Jianzi) in the air by striking it predominantly with legs.
• Cuju — an ancient ball game which involves kicking a ball through an opening into a net.
• Qianball — a racket and ball sport developed in China which can be best described as a mix of aspects from tennis and squash.
• Zui Quan (or Drunkard’s Boxing) — a concept in traditional Chinese martial arts.
Historical Strengths Yield Current Greatness
Today’s Chinese athletes continue to exhibit exceptional abilities in modern sports that use some of the same skills as these traditional ones. From an Olympics sports perspective, China continues to lead the world in the following games:

One common elements among all of these sports is that they are often thought of as ‘summer’ games. In fact, Chinese athletes earned gold medals in all these sports during the last summer Rio de Janiero Olympics in 2016.

Sport as Catalyst to Economic Growth
China is now setting its sights on being equally successful in winter games. The coming 2022 Beijing games represent a major Chinese commitment to leading the world in winter sports. Their commitment to this effort is almost unparalleled. China is building an entire winter sports industry and training hundreds of elite athletes so it can dominate the 2022 Winter Olympics. China’s plan is to create 300 million skiers, skaters, ice hockey players, and other winter athletes within the next few years — some of whom will represent the country in four years’ time, when the country’s status as host will allow it to enter athletes into every single discipline. Accomplishing this will require

  • Creating 300 million skiers, skaters, ice hockey players, and other winter athletes within the next few years — some of whom will represent the country in four years’ time.
  • Building 800 ski resorts and 650 skating rinks by 2022

In short, China has planned to bootstrap an entire winter sports industry in the run-up to the next Winter Olympics. Since these plans were announced, real estate developers have built massive new facilities to meet the country’s demand for winter sports. Coaches from places like Britain and Canada have flocked there to make a living.
Why is China investing so heavily into this initiative? According to Business Insider (2/21/18), because China has committed to hosting the next Winter Olympics Games and the nation is determined to “win big and look good” in front of their home audience. Liu Bo, a former ski trainer, told Reuters that Chinese President Xi Jinping was determined to have China be the preeminent in the 2022 games and would not accept a situation where the stars of the show are “all foreigners.” “President Xi will not allow this to happen,” he said. “We have to be the leading actor in 2022.”

There are also significant economic reasons. Authorities expect China’s winter sports industry to be worth 1 trillion RMB ($158 billion/£113 billion) by 2025, the South China Morning Post reported. As of last year, it was worth around 397 billion RMB ($62 billion/£45 billion), the China Daily said, meaning the industry would need to almost triple in size to meet the target.

 

Word4Asia is a California-based consulting firm helping build productive bridges with China.  Starting with our deep experience and expertise in Chinese culture and a strong China-based professional network, we create customized approaches to help our clients accomplish their goals and aspirations.  If your organization has an interest in expanding your presence in China, we’d be happy to discuss it with you and perhaps lend a hand!  Contact us at gene@word4asia.com

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

A year ago, April, China’s National Development and Reform Commission announced a lifting of the caps on foreign investment ….

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