Will China surpass the US market in auto sales? Can a Chinese-branded car company compete on a global level? As Chrysler’s first Regional Vice President in Northeast Asia with over 20 years in the automotive industry, Bill Russo has the scoop. He was also kind enough to chat with me via Skype for this illuminating Q&A. For Part 1 of a 2 part series with automotive industry expert Bill Russo, read on.

You made a leap from the US to China in 2004 to serve as Chrysler’s first Regional VP in Northeast Asia. What have you discovered about China?
You’re not going to find too many places experiencing an acceleration curve similar to what China has been enjoying. You get the feeling when arriving here that you are transported to a different point in time and feel a positive momentum and pull towards the future. In this way, China is unlike any other place in the world. The US probably experienced this when they opened up the West over a century ago or right after the Second World War when America became the dominant industrial nation. Until very recently, there has been a feeling of unbridled enthusiasm about China’s future. I still get the feeling here that tomorrow will be a better day than yesterday was. It’s contagious once you’ve experienced it.

I was reading that in December- for the first time ever-there were more cars sold in China than in the United States.
That actually occurred in January. Keep in mind that China has been the most explosive global market for the automotive industry for the past decade. A lot of the experts recently have been forecasting a slowdown- well, it’s real. GDP growth in the 4^th quarter in China slowed significantly to 6.8%, but compare this with what you’re seeing in other parts of the world. Since 2003 the overall vehicle market has more than doubled in size, from 4.56 million units to 9.67 million units. Passenger vehicle manufacturers- the companies that produce cars, SUVs, and MPVs (extract the buses, trucks, and other commercial vehicles)- saw an increase from 2.36 million units to 5.91 million units in just 5 years time. China’s automotive industry has been growing in the double digit range up until 2008. In 2008, automotive sales growth slowed to a year-over-year 8.7% increase. In January, China’s total auto sales were 735,500 units compared with the US’s 656,693 units. Forecasting is an imprecise science, but one thing that has been absolutely true since I’ve been involved in the Chinese market is that the numbers have always exceeded predictions in terms of the market growth. No one expected China to surpass US auto sales until the middle of the next decade. You have to consider that the biggest selling month in China is January. Chinese New Year is when people do a lot of their shopping, when they return to their homes and want to show “face” to their families. This is why car sales peak just prior to the holiday. So, while world leadership in January sales makes a good headline, I don’t believe that over the full calendar year, China will beat the US in total sales. But this one month has given us time to reflect on how far this country has come.

Does the slump in US auto sales play into this comparison as well?
Absolutely. Since 1994, the US has been a 15 – 17 million unit total market.  According to recent quotes from industry leaders, it looks like everyone’s expecting only a 10 – 11 million unit market this year. The forecast of only a 10 – 11 million market this year shows you how significant the economic problem is in the US. The American auto market very rapidly lost nearly 40% of its overall volume. But, it’s unlikely that the US economy will settle at this low rate forever. At some point in time the US will bounce back to being the number one market again. China will eventually surpass the US as being the largest auto market in the world on a sustainable basis.

When you state that “China will eventually surpass the US as being the largest auto market in the world,” when do you see that occurring?
Well, as I said before the forecasts on China have always been wrong. If the forecasts say “the middle of the next decade,” I’d move that up to within the next 3 years. One of the barometers that economists typically follow is GDP growth per capita – also known as purchasing power parity. The number that signals when a market has reached a level where domestic consumption can sustain an industry on an ongoing basis is US $6,000. If I go back a few years, China’s GDP per capita in 2001 was US $1,000. In 2008, it was US $5,943. This increase signals that China has arrived as a sustainable domestic consumer market. You have enough citizens and enough wealth that people can afford big ticket items like cars which can sustain growth for a long period of time.

The US is now focused on promoting the manufacturing of hybrid vehicles. Do you think that consumers are going to be willing to pay more to go green in both the US and in China? Has China become eco-conscious when it comes to vehicle manufacturing?
There’s definitely awareness of the technology in China. What China does better than some other countries- including the US- is that they try to instill on the consumer side an awareness of the urgency of the issue. The way China does that is they impose a consumption tax, so higher-fuel consuming vehicles when purchased are assessed a higher tax rate. In Europe they do it by taxing fuel, which is a similar approach. By implementing these policies, it signals to the buying public that they need to be aware of the impact of the purchase they’re making. The US assesses their regulations on the manufacturers; they use a system called corporate average fuel economy, which is fraught with problems. In China, when consumers consider their vehicle purchases, they focus on engine displacement. Engine displacement is what they regulate in China- consumption tax is based on the displacement of the engine of the vehicle that’s being purchased. I think what China will look for in the near future are lower fuel consuming technologies. Hybrid vehicles will not appeal to consumers purely on the basis of technological sophistication. What the consumer in China will look for is the total cost of ownership- is it better from a total cost of ownership standpoint to buy a hybrid vs. a conventional fuel efficient engine. I don’t think a hybrid is really what people in China are interested in. The vast majority are looking for an overall cost-effective mode of transportation. I see a movement toward clean diesel. Diesel has already been introduced successfully in some Asian markets. Consumers can clearly see the value proposition of clean diesel technology: lower fuel consumption, lower emissions and better acceleration that can offset any up-front cost for the technology. Outside of a technological “coolness factor,” the value proposition of gasoline hybrid engines are less apparent. There are two questions that will determine whether a technology like hybrid gas or clean diesel will receive market acceptance: Will they be more favorable from a tax standpoint and how will it impact the cost to operate the car? European governments encouraged people to buy diesel because it was cheaper to buy the fuel. They’re more willing to pay for the technology if they get a lower cost of operation. In China, one of things that will limit the acceptance of diesel will be the availability of clean diesel fuel.  The infrastructure isn’t there yet.

Do you see investment increases in these types of technologies in China?
One thing you can guarantee is that there’s a lot of R&D investment in a lot of directions in China. So, to answer your question-yes. I think the Chinese are really working to establish themselves on the forefront of whatever technological developments are happening in this industry. One thing is for sure- you’ve got about 25 percent of the total Chinese market that’s held by Chinese-branded vehicles. The Chinese OEMS are certainly in it and they’re here to stay. They want to make sure that they can adapt to technologies introduced by foreign OEMs. What typically happens here is that companies come to China lured by this tremendous growth market. They invest with local JV partners because they are required to. Those local partners do a variety of things to adapt or reverse engineer the technology into their own branded vehicles. China learns quickly how to develop their vehicles and component technologies with the help of foreign capital investment. Sometimes they work through the process of acquiring assets from foreign OEMs, but the whole system here is geared toward transferring critical development capacities to the local companies. Chinese OEMs will not skimp on investing in areas where future development needs to be focused.

Want to reach out to Bill Russo? You can contact him at:
Email: bill.russo@gmail.com
Twitter: http://twitter.com/billrusso
LinkedIn: http://www.linkedin.com/in/williamrusso

This is part 1 of a 2 part interview with Bill Russo.  Be sure to check back on Thursday for Part 2, which addresses automotive branding, the ‘Buy American’ provision, structural realignment and… Twitter!

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