like the country’s soaraway economy, the Chinese car market continues to defy expectations with its pace of growth.
In the first half of the year, sales of passenger cars increased 26 per cent, maintaining the rapid clip that the market has shown since the start of the decade.
Even though only about 2 per cent of Chinese citizens own a car, the market is on course to see sales of more than 5m new passenger cars this year, making it the second largest in the world.
Two years ago, there were many dark warnings from government officials about the potential for over-capacity in the industry, as manufacturers poured in huge amounts of investment. However, many of the carmakers in China are working at full throttle just to meet the rising demand.
But while a number are establishing strong franchises in the market, several are struggling to avoid being left behind.
China may not have too much capacity, but it does have too many auto companies. There are 82 car brands in the Chinese market, compared with 47 in the US, and 47 producers against 15 in the US. Something has to give.
Two years ago, it looked as if the market leader Volkswagen was in serious trouble in China. Its once dominant market share was shrinking fast and it began to face significant losses.
However, over the past year the German group has begun to re-assert itself. Sales were up 25 per cent in the first half and the group’s market share has risen to 18 per cent of the passenger car market, according to industry consultancy JD Power – a comfortable advantage over its nearest rival.
Cost-cutting has played a role, but the group has also positioned itself more cleverly in a market where consumer attitudes are occasionally tinged with nationalist sentiment.
“We are moving from being a completely international company to being the most Chinese of international brands,” says Winfried Vahland, chief executive of Volkswagen in China.
General Motors remains in second place, although its market share has slipped back by 1 percentage point in the first half of the year, after sales increased by 11 per cent.
Among multinationals, the strongest advance is being made by Toyota, which has increased sales by 70 per cent in the first half of the current year.
The Camry model is now the second most popular in the country, with 80,000 sales in the first six months. Nissan and Honda also increased sales by more than 30 per cent. Meanwhile, Ford, a latecomer to the market, recorded a 27 per cent increase so far this year.
Some multinationals are showing signs of strain in China, however. Peugeot/Citroen has a 4 per cent market share – which makes it the eighth largest brand in the country – but sales increased by only 2 per cent in the first half.
The multinational facing the biggest problems is Fiat, which has been highly successful in other emerging markets, but which has yet to establish a significant presence in China – its market share is less than 1 per cent.
Sergio Marchionne, the group’s chief executive, admitted this year that Fiat had “missed an opportunity” in China.
The group has recently signed a joint-venture agreement with Chery Automobile, the fast-growing Chinese carmaker, which will include the first sales of the Alfa-Romeo brand in China.
Among the Chinese brands, there is a similar phenomenon. Chinese carmakers now account for about 28 per cent of the market, a rapid increase that has taken the industry by surprise. Chery is now the third largest brand in its domestic market, with sales of 207,000 in the first half of the year.
However, there are still a large number of Chinese companies fighting over a small section of the market. In the first half of the year, there were 16 Chinese carmakers with a market share of 1 per cent or less. That means a huge overlap of operations including dealerships and research and development departments.
There are some signs, though, that the long-awaited consolidation of the Chinese carmakers could be about to begin. In July, Shanghai Automobile Investment Corporation (SAIC) – the largest manufacturer of cars in China by virtue of its joint ventures with Volkswagen and General Motors – announced that it was holding merger talks with Nanjing Automobile, Fiat’s partner.
Beijing has long pushed for more mergers and acquisitions among its car companies to try and create a handful of competitors with sustainable business models. The two companies bought different parts of the UK’s Rover when it went bankrupt and have since launched almost identical models based on the old Rover 75 that are competing directly against each other, so a merger would offer considerable synergies of the former Rover assets.
However, the discussions are politically delicate. Both companies are state-owned and industrial champions of their proud local governments.
Although any deal would effectively be a takeover of Nanjing by SAIC, it would have to be structured in such a way as not to damage Nanjing’s pride.
Takeovers in corporate China are rarely a straightforward matter.