China’s mass of aspiring new drivers are an attraction for car makers the world over. With American, Japanese and German auto companies long entrenched in the country, and China’s domestic car makers gaining ground and resisting consolidation, the field is crowded and competitive.
Now is not the best time to be one of the struggling ones. Car demand is plunging in the US and Europe and the effects of the global economic crisis are being felt in China. Sales dropped 3.9% year-on-year in September, with the price of gas rising to US$3.18 per gallon – higher than some locations in the US.
For Sweden’s two leading passenger car brands, Volvo and Saab, the challenges of China arrived well before the current economic slump set in.
Both Saab and Volvo have pinned their China hopes on the premium segment of the market, competing with than some locations in the US. struggle, while parts makers have found their niches the likes of BMW, Audi and Mercedes Benz. While BMW and Benz have both sold more than 30,000 units across their brands in 2008, Volvo has sold just 5,000 of its Chongqing-made S40 model. Meanwhile, Ford – which owns the Swedish brand’s passenger car division – said Volvo, Jaguar and Land Rover imports to China totaled just over 5,000 in the first quarter of the year.
Cut and run?
This poor performance contributed to rumors that Ford would sell Volvo, with Shanghai Automobile Industry Corporation (SAIC) mooted as a possible buyer, but no announcements have been made.
"During a downturn like this, anything is possible," said Yang Jian, managing editor of Automotive News China. "As Ford is fast burning its cash, selling Volvo is an option to keep it afloat."
Saab’s market slice is even smaller than Volvo’s, with just 107 units sold in September, according to company figures. Saab is targeting the very top end of the market, a policy best evinced by its intention to release just 10 of its US$93,600 Turbo X limited edition model onto the China market in early 2009.
Volvo and Saab’s truck and bus divisions are faring better. Volvo Trucks, which is still Swedish-owned and includes Renault Trucks and Mack Trucks, as well as the recently acquired Nissan Diesel. It is leading sales among European truck makers in China.
However, 98% of the 450,000 commercial vehicles sold each year in China are made by domestic manufacturers, according to Lansi Jiang, Volvo’s vice president of corporate communications. Dongfeng Motor dominates the lower-to-middle end of the market, where China’s real demand for trucks lies. It charges at least 50% less for its vehicles than Volvo.
Scania, Saab’s bus and truck manufacturing arm, sells heavy-duty, 18-ton-andover trucks, and has fewer than 1,000 in operation on China’s roads. Its strategy is to partner up with local long-haul logistics firms that require trucks capable of circumnavigating China and enduring the extreme temperatures that this entails.
Yet Mats Harborn, head of Scania’s China operations, suggests there are few Chinese transport irms that require trucks built to the specifications Scania offers. "The majority of operators don’t get enough work to do in a day," he said.
Harborn also cites "immaturity in the market" as a major reason for limited demand. "When we sell our trucks, they need constant overhaul and repair. We need to provide this service as part of a professional relationship. Most of the industry doesn’t get it."
One advantage Swedish-made buses and trucks would have in a more mature market are their higher emissions standards. Scania, for example, already produces trucks compliant with the Euro VI standard. With Beijing already operating under the Euro IV standard and the rest of the country due to fall into line in 2011, this may be a cause for hope.
But Jack Perkowski, author of Managing the Dragon and founder of leading auto component manufacturer Asimco Technologies, doubts this advantage would last for long.
"One way or another, local firms get the technology required to meet higher emissions requirements, so this is not a boon for foreign manufacturers," he said.
Though marquee automakers like Volvo and Scania struggle in China, a number of smaller, niche parts makers and tool makers from Sweden are thriving. Unlike whole-vehicle manufacturers, they are not limited to minority stakes in no more than two joint ventures.
Ee Sian Lee, general manager of Sandvik Coromant Greater China, a Swedish firm that supplies industrial tools to auto manufacturers, said business had grown steadily in recent years through partnerships with Volkswagen (VW), SAIC and Chery
Another Swedish firm, SFK, has done well supplying both domestic and foreign manufacturers like General Motors, Ford and VW with high-tech automotive products such as bearings, sealing solutions, lubricants and mechatronic systems. While some Chinese competitors manufacture these products individually, none offer the complete integrated system that SFK does.
The group has 12 factories in China, two of which are joint ventures, but imports two-thirds of the finished products it sells here. As well as exploiting lower manufacturing costs by producing in China, SFK’s after-sales service is a key selling point. The company offers monitoring systems that indicate when its primary products need to be serviced, which reduces costs for customers
SFK has posted 30% annual growth over the last few years.
Autoliv, the leading supplier of seat belts, airbags and safety electronics, both globally and in China, is a third Swedish company that has made significant in roads. Autoliv’s China president George Chang chalks up his firm’s success selling to major Chinese brands.
The waiting game
Swedish automakers, meanwhile, are waiting for the local market to catch up with them.
"The economic crisis will force Chinese auto makers and customers to improve efficiency and productivity," said Scania’s Harborn. "They will be forced to consider the life-cycle of an investment, rather than short-term gain."
Such hopeful sentiment is common across the industry, with experts and company leaders alike confident in the growth potential of the market.
"Look for growth in the 8-15% range in the years ahead," said Asimco’s Perkowski. "Penetration rates for autos is still very, very low in China, so there’s plenty of room for additional growth."