The article was first published in Automotive World’s Guide to the automotive world in 2016.
Whatever the current state of affairs in China, let’s be clear that the decline in commercial vehicle production and sales numbers is merely a speed bump and not a meltdown.
China still offers significant benefits in terms of continued internal investment in infrastructure and development, above average industry and trade sentiments, and GDP growth that is higher than in most other economies globally. Besides, as China moves towards a more consumer-oriented economy, the demand for goods and services locally will become the engine of automotive growth. Beyond China, there is a need for OEMs to look at other avenues of growth, be it export-driven or geographical expansion of production base.
In November 2014, as we were penning down our thoughts on how China’s automotive market is likely to shape up in 2015, we were concerned about market growth rates, anti-trust fines, role of local OEMs, and how China will sustain its dominance in the global auto market. As we progressed through 2015, everyone – OEMs, government, consumers, analysts – focused only on one aspect – China’s economic slowdown. Unfortunately, numbers validate that fear as we go into 2016.
While the story of passenger vehicles was more positive, with production and sales growing by 2.2% and 3.9% year-on-year, respectively, during the first 10 months of 2015, the production and sales of commercial vehicles during January-October 2015 declined by 11.3% and 10.6% year-on-year, respectively (as stated by China Association of Automobile Manufacturers). Figures for trucks were down 12.7% (production) and 11.9% (sales). There was some positive momentum in October, but not enough to make much impact on overall slowdown.
Will 2016 be any different for China’s CV market prospects? Unlikely. At best, the double-digit decline in production and sales that was seen in 2015 might come down to single-digit figures on a year-on-year basis, and we might see the market consolidating its position as the world’s CV factory. Growth apart, the bigger issue will be how OEMs manage inventory and production lines in 2016, and how OEMs restructure their operations to mitigate further risks of China’s slowdown.
Could exports be a way out for CV OEMs, to avoid getting slammed by China’s economic slowdown? Perhaps. 2016 might just be the year that OEMs with production base in China look at China as a serious export hub for the Southeast Asian region.
With several large scale infrastructure projects underway in the Southeast Asian region, the demand for CV, especially trucks is likely to be significant. Indonesia is a great example of how China could benefit from being an export hub of CVs. The country aims to complete over 300 major infrastructure projects including ports, railways and highways by 2025, and is likely to see a substantial demand for transport and construction vehicles. Similarly, the ambitious One Belt, One Road project and the establishment of the Asian Infrastructure Investment Bank (which aims to fund infrastructure construction in the region) are likely to provide a lucrative platform for China-based CV manufacturers to cater to the growing need for various commercial vehicles in the region. Vietnam, The Philippines, and Myanmar are not far away in terms of their infrastructure investment hunger, and have over the years displayed significant need for trucks, construction vehicles, and vehicles for public transportation.
Neighbouring India presents a very interesting opportunity as well. With the new government’s focus on infrastructure development, there is space for China-based CV OEMs to make their mark. Beiqi Foton and BeiBen are actively exploring this opportunity, in spite of severe competitive threat from Indian OEM powerhouses Tata, Mahindra & Mahindra, among others.
2016 might just be the right time to explore these opportunities and take the leap of faith. Those CV OEMs which are able to see the long-term benefits of expanding in this region, are likely to gain immensely.
Another area of interest in 2016, specifically for Chinese CV OEMs, might be looking at setting up production units in South America and Africa, with OEMs unlikely to invest further in their China operations to add capacity at this stage of excess inventory. Africa and South America have been steady partners over the last several years, accounting for over 50% of China’s CV exports.
A renewed look at prospects in South America (Brazil as a possible export hub to both South and Central America) and Africa with its growing appetite for infrastructure development, an area that China also has deep interests in, could provide an avenue of growth for Chinese OEMs given the strained economic conditions locally. These initiatives, however, should not be knee-jerk reactions to current issues with slowdown, but must be looked at from strategic long-term perspective.
Back home, one wonders how the CV market will restructure itself. Local CV OEMs are clearly dominant, with few foreign OEMs managing to make their presence felt in the market. Various JVs in recent times have somewhat changed this picture, but the CV market is still quite fragmented. While there are a few specialised large OEMs operating across the value chain, one wonders if it is not the right time for further consolidation. There are a large number of small vulnerable manufacturers operating in the CV space, and perhaps some form of consolidation will help strengthen market dynamics.
The other aspect to consider, thanks to the imposition of stringent emissions standards, is how China’s CV market is slowly moving from price-focused purchase to product-focused purchase behaviour – 2016 might just be the starting point of China’s westernisation of CV market.
As we stand at the doors of 2016, it seems that OEMs have not one but several ways out of this slowdown. The question is if they have the risk appetite to make most of this downturn by expanding their presence beyond China – in both sales and production terms.