The Rise of Local Competition in China

While researching China’s wind turbine market, Liam Denning, who writes for the Wall Street Journal’s Heard on the Street column, noticed that Chinese companies have been gaining market share at the expense of their foreign counterparts. According to Denning’s findings, foreign companies’ share of the wind turbines sold in China dropped to 13 percent in 2009 from 80 percent in 2004.

The rise of local Chinese competitors in industry after industry is a trend that MTD has been covering in a series of articles on commercial vehicles, construction equipment and most recently, passenger cars.

With the General Motors initial public offering in the news, Liam noticed MTD’s article on passenger cars and called to discuss what this trend meant for GM in particular, and foreign car assemblers in general. Press reports this year have noted that GM is now selling more cars in China than the company is in the United States, and China’s red-hot vehicle market is mentioned eight times in GM’s preliminary initial public offering prospectus.

The trend that caught Liam’s attention is that Chinese brands currently account for 32 percent of the market, but that is an increase from 18 percent in 2000. MTD’s article suggested that Chinese brands would continue to gain share in the years ahead, which raised several questions in his mind. The first, “Are there any forces at work that might reverse this trend?” And, “What happens to the sales growth rates of the foreign brands if the local brands continue to gain market share?”

In response, I repeated the arguments made in MTD’s recent article, Winners and Losers in China’s Passenger Car Market. Chinese car makers will continue to gain market share because: (1) they are steadily improving their quality and technology; (2) the future unit growth in China is likely to be in smaller, more affordable cars where they have cost advantages; and (3) foreign car makers effectively have one hand tied behind their back in China due to the 50 percent limitation on foreign ownership of vehicle assembly operations in China.

Bottom line, Liam concluded that, if Chinese brands account for 45 percent of the passenger car market in China by 2020, foreign brands’ average annual sales growth would be cut from 30 percent over the past decade to 5 percent over the next seven years. If the share of the Chinese brands’ increases to 50 percent foreign companies’ sales growth slows to less than 4 percent per year.

Liam’s article, Auto Makers Face Twists in China’s Open Road, l appeared in Friday’s Wall Street Journal.

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