Big challenges ahead

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Bad signals everywhere

Thanks to the Economic Crisis, western car maker may face a pause from chinese carmaker's threat. GM is facing tougher than ever financial problem. Renault has decided to close temporarily some of its production units and now CEO Carlos Ghosn will miss its RC2009 target. History will not tell if Ghosn's plan was indeed effective or not. Even world's fastest gowing car market is now weakened, and the sales have dropped again on september following the plunge on August. However some says that it is temporary, and China's car industry will recover next year. We have to wait until the end of the year to see wether China's car sales could keep its two digits growth in 2008.
As a remedy to this illness, local carmakers are expanding dramatically their sales network. This action is set to reach the sales target, and it is possible smaller carmakers are forced to play local, if they are not able to raise cash to open new dealers. As a consequence to the economics slow down, the inventories of the carmakers are growing. This may not be a new problem, as state owned carmakers like Chang An and Dongfeng were consistently parking their production in large open sky areas. That's the whole picture, in hard times, stock grows, prices are cut to increase sales, that may result in the 2004 episod of price battle following the sudden downslide of car sales.

What's next ?

In hard times, the small ones are eaten by the big ones. Recently, big local player like FAW have shown interest in buying small makers (Hafei Motor). The coming economic crisis might accelerate the movement. We are likely to see more mergers in the coming years. Even thought you see small carmaker showing dynamic growth plans, in the end their only goal maybe to inflate their value to be sold at a better price.
In the short term, carmakers will offer big discount on their models. FAW is already offering 1000 USD discount on some of its models, ChangAn goes further with discount up to 2000 USD. If only they had to reduce their margin, but some will sell at a loss their old models and discount their new cars. It is estimated that one third of the dealers will shut their operation by end of 2008.
As usual, this wake up call will force dealers to rethink their business, and surely they will raise their service quality. The situation is very complex, and it is impossible to know who will merge with who. The recent drop in oil price isn't enough to stimulate the market. The soution may come from the chinese government, which is due to give incentive to pull up innovation. By 2011, the first electric cars will start to be sold. It is difficult to predict how the Chinese will welcome the green cars, as their car history is short. We can compare to the development of the cell phone market. The fixed telephone share is lower than the mobile phone share, because of the rate of expansion of the market. So the Chinese are more accustomed to mobile hone than cell phones. We may encounter the same leap forward for the car industry.