A Growing Global Force: China’s Impact on the Auto Industry

Greg Baker/AFP/ Getty Images

Source:Greg Baker/AFP/ Getty Images

In 2013, Apple unveiled the iPhone 5s and it came with a shiny new color choice: champagne. Basically, it’s a gold option, and industry coverage revealed that Apple had developed this flashier color in part because of the Chinese market, which is an important player in the world economy. It seems that anticipating this appetite for the look of luxury paid off, because Apple realized 26% revenue growth in the Chinese market coincident with the introduction of the champagne iPhone 5s.

So why, you may wonder, am I writing about the iPhone in an article about cars? The answer is that the influence of the Southeast Asian market, specifically China, is not limited to the color of iPhones. As the largest car-buying market in the world, it is having a significant impact on the automotive world as well.

ChinaFotoPress/Getty Images

ChinaFotoPress/Getty Images

For the scope of this article, I limit my comments to the Chinese market. At 1.357 billion people (roughly 4.3 people for every person in the U.S.), China commands a lot of market attention. As Emily Coyle reported for Cheat Sheet, China was the leading country for global auto sales in 2013 and had been since 2010. In 2014, China racked up 11.8 million new car sales in the first five months of the year, compared to eight million in the U.S. over the same period. By 2020, it is expected that China will surpass the North American and European continents as the largest area market for auto sales.

It’s easy to see why large companies will be focusing on tailoring their product to fit with this market. Producing a car that fits the needs of the Chinese masses can lead to significant revenues for automakers.

Interestingly, there are reports that automakers are making a fair amount of money on their luxury offerings, amid accusations of questionable market equity, by appealing to the wealthy individuals in China — specifically the wealthy youth, the fuderdai (pronounced foo-arr-dye).

“Foreign carmakers have chosen to set prices of luxury cars excessively high in China, where the rising ranks of the rich are willing to buy expensive foreign brands to show off their wealth, and where there are no domestic luxury brands to compete with,” Rao Da, secretary general of the China Passenger Car Association, told Reuters.

Ed Jones/AFP/Getty Images

Ed Jones/AFP/Getty Images

Unfortunately for automakers, the market has started to shift. Reports of exceptionally high pollution in cities and congested roadways have led many municipalities to limit the number of license plates that they offer in a given year in an attempt to minimize the environmental impact. The plan is to restrict the number of gasoline/diesel cars while leaving the market open for alternative and advanced fuel vehicles.

In some cases, the cost of a plate has been five times more than the price of a small city car. This has led to some interesting buying behavior from consumers. From the linked article above by Christopher Beddor, Yale Zhang, Managing Director at AutoForesight, says:

“Consumers will think, ‘I spent so much money on a plate,’ or ‘I went through the lottery system a million times and finally got this car plate, so I need a good brand that I don’t need to upgrade frequently.’ So even if the original plan was to buy a local [car], after they get the plate they increase their budget — sometimes by double — and buy a foreign-branded car instead.”

Many analysts expect that SUV and large sedan sales will start to play a larger role in the Chinese market. Restrictions on vehicles powered by fossil fuel should also open the door for EVs. Tesla, which invested heavily in the Chinese market early on before reducing its presence due to slow sales numbers, has been gaining momentum over the course of 2015.

The company’s sales numbers in China are roughly 10% of the number of vehicles that are sold in the U.S., but I would expect the Model X to garner some additional attention. Also, Tesla has committed to keeping the price of the Model S, excluding taxes and import fees, at parity with the U.S. pricing when it is sold in China.

JOHANNES EISELE/AFP/Getty Images

JOHANNES EISELE/AFP/Getty Images

To date, most of the conversation surrounding the car market in China has related to cars being imported into China. China does have a domestic automotive production industry and exports roughly half a million cars per year, but they are primarily focused on markets in Asia.

Some analysts believe that China will become a larger player in the automotive production market in the future. It’s hard to predict what will happen, as is the nature of disruptive Black Swan events. However, one thing is certain: China represents a major force in the global market today and will continue to drive (pun intended) trends in the future.

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