Perhaps no other sector highlights today’s global economic environment more than the automotive industry. This Link Up, Learn More interview features insights from automotive industry expert, Bill Russo, who is also the Founder and President of Synergistics Limited, and Beijing Association of Automotive Manufacturers Chairman (and retired Chairman of Beijing Automotive Industrial Corporation) An Qingheng. In order to gain an informed understanding of the US-China relationship, it is imperative to seek perspectives from both sides of the globe. This interview with Chaiman An and Bill Russo aims to do just that. Read on for Part I of this two-part series:

Automotive consumer trends in the past year alone have shifted dramatically. While many Chinese buyers are looking to purchase fuel-efficient cars or foreign-brand luxury models, Americans seem uncertain about future vehicle purchases. What do these trends mean for the development of China’s auto industry?
Chairman An: Market Opportunity: I believe that the global market of luxury automobiles is not favorable. Most of the customers, especially those in China, would like to purchase compact vehicles with low consumption. The China automotive market has been switching to this direction for several years. Therefore, OEMs in China, including global giants and local brands, all expanded their compact and economy car business with advanced technology for the purpose of grabbing more market share. This market opportunity is advantageous to the development of automotive industry in China. The cooperation between BAIC and Hyundai met with some difficulties in the past two years. Later, Beijing Hyundai launched new compact car “Elantra Yuedong”, based on the original Elantra. This helped improve the business performance immediately with the help of this market opportunity. This year, in order to face the financial crisis, the Government launched the Automotive Industry Stimulus Plan, which increased the sales of Beijing Hyundai cars with 1.6L or lower engines to an astonishing 92,000 units in 1^st quarter, increased by 84.8% then same time last year. This fully revealed the power of policy and market.
Cooperation opportunity: Several years ago, some Multi-National Corporations (MNCs) developed the understanding that in the automotive cooperation, the foreign company exchanges their technology for market access while China partner exchange the market for technology. Therefore, without this understanding the cooperation with foreign companies can be difficult, and in fact not always fair. Now the condition is different, especially as a result of the dramatic market changes, global giants can’t simply ignore the market opportunity and must cooperate closely with their China partners. They have to make compromises, which makes the whole thing more reasonable. Now both Chinese and foreign parts in their cooperation should make good use of the opportunity, expand the cooperation to achieve mutual benefit. Of course, this win-win should be for both sides, not one side wins and the other loses.
Adjustment opportunity: In order to overcome the financial crisis, some global auto giants are restructuring and selling some assets and products, including some famous brands. I know that such assets and products are not out of date. They are doing this to raise cash, which is critical to maintain their business. Local auto companies can accelerate their development if they can selectively purchase such assets that fit their needs. In China there is a famous saying that “a hero is known in the time of misfortune.” In this turbulent auto market, some companies can surely realize extremely fast development. BYD seems to be at the front line now, to some specialists. Of course, BAIC also hopes to make good use of the opportunity and speed up their development.
Generally speaking, we should notice that China has been insistent on both independent R&D and foreign cooperation, through which advanced technology is successfully introduced and digested. Both sides achieved the outstanding development and developed China into an automotive manufacturing and sales giant. The development of China, the Chinese automotive industry and of the Chinese auto market provides an opportunity for further evolution of the automotive industry – both within China and abroad. In turn, the future development of the China automotive industry will affect the development of the world automotive industry. Therefore, we should all pay close attention to this.

Bill Russo: To this quite comprehensive view, I would only add that China cannot be described as a “uniform” market. You have different types of buyers in different categories. One very consistent pattern is that it tends to be a market that values displacement. There is definitely an awareness of and sensitivity to fuel economy and in particular, the size and power of the engine is fairly well known by the consumer. In China, the policymakers know how important it is to influence consumers to make fuel economy a higher priority. They place a tax on consumption and they do that by charging a percentage tax based on the engine displacement of the vehicle. So, it’s fairly well conditioned into the minds of the consumer that they must pay attention to fuel economy. It’s not a parameter that they can ignore in their buying decision. However, you have a market in China that is fairly diverse. Entry-level consumers tend to seek lower-priced vehicles and therefore total cost of ownership is very important to them. But, many Chinese consumers are shopping luxury products and they tend to look for foreign brand vehicles that will showcase their social status. Even for luxury consumers, fuel economy is much more important in China than it has historically been in the US and other markets.

Will the future of automobiles rely on clean-diesel technology, hybrid gas technology, or something else entirely? What will the role be of China’s government in the development of the next generation of automotive propulsion technology?
Chairman An: What will power future automobiles is still a difficult question. Will it rely on clean diesel, hybrid technologies or something totally different? Different specialists have different viewpoints. In fact, with traditional energy resources decreasing day by day, all parties have reached the same understanding: that new energy should be developed to power future automobiles. Concerning which technology should take the priority in different points of time, every solution has a reasonable rationale. History will tell us who is right.
In the real world, we still have to rely on traditional combustion engines and further improve it with new technologies to lower fuel consumption and emissions, which is necessary to save energy and meet the continuously more strict regulations. Among the several paths of new energy automobile development, to realize mass production of various hybrid power automobiles and thus decrease emission, lower fuel consumption becomes the practical plan. OEMs like Toyota are taking the lead. Simultaneously, the development of various electric powered automobiles is brought up to the agenda; electric cars including Volt of GM have become the hot topic. I believe that this will be the direction. Actually, many people expect that electric cars can replace traditional cars, but this is still no more than a good wish till now. I am not a specialist of electric cars, but I have spent some time on the future development of them. I am of the opinion that as long as the Chinese Government can stick to their strong support to the development of new energy cars, China will greatly influence the development of the next generation of car propulsion, and even play a major role in the “revolution” of automotive power technology.
China Central Government supports the One Thousand New Energy Cars in Ten Cities Plan. From central to local government, great support and financial aid are given to the development of new energy cars. All such actions will accelerate investment and technology development. I also agree that electric cars won’t replace at once the traditional cars, and the development of electric cars is not that optimistic, because a lot of technical issues and corresponding infrastructures and facilities need to be tackled – and this will take some time, and quite some effort. The market acceptance can only be decided thereafter.
In fact, no one can deny that China is not behind advanced countries on new energy automotive technology. However, with nationwide focus, manpower and capital investment, the technology is destined to develop even faster. If China can realize a breakthrough on battery manufactured technology (where cooperation with foreign countries is also possible), the evolution of automobile power technology is likely. The breakthrough of China in this respect will in turn benefit not only China, but also the world. We expect that.

Bill Russo: The Chinese automotive market is still very young, and in many cases the producers of vehicles that are sold in China are also fairly early in their development stage. What has happened over time is that, as the market has grown, more and more technology providers have taken note and looked at China as a place where they can localize their product. So, for technologies such as clean diesel, hybrid and electric vehicles – you will find that China does not lead the technological development. In fact, Chinese companies are not leaders in the development of any major new automotive technology. But that is the view from the supply side. The area where China has the opportunity to lead is on the demand side. On the demand side you have the largest vehicle market in the world; you have economies of scale that can accrue to those who provide relevant products to service that market; and you also have an industry that is highly regulated by a government that puts a very high premium on fuel economy. As an example, I mentioned earlier the focus on fuel consumption focus and engine displacement.
The role that China will play will grow larger as the size of this market expands. To some people who observe the industry, this may not seem intuitive. Most industry watchers believe you can only lead the development with supply side innovation, and China is not a place where you will find the most leading-edge innovation, especially for automobiles. Most developed countries rely on their industries to introduce new technological innovations and invest in those technologies. However, China intends to take the lead with infrastructure investment. Consider that about 45% of China’s $588 billion USD stimulus plan is to be invested in projects developing China’s infrastructure. Replacing internal combustion engines with other technologies- such as hybrid electric, full electric, hydrogen powered vehicles or clean diesel- requires collaboration between business and government to develop the infrastructure in tandem with development of the technology. One needs to support the other. The economics of the product itself and ultimate market acceptance is very much dependent on the availability of the infrastructure to recharge or replenish the fuel. It’s not realistic to expect a company to reinvent the technological underpinnings of the automobile unless there is a concurrent development and investment in the infrastructure to support that new technology vehicle. This is especially true in today’s weakened global economy. Consumers only accept a new technology product if it is superior in overall price and performance to the technology it replaces. Generally, new propulsion technologies are evaluated by the consumer in terms of their impact on the total cost of ownership associated with that product. Alternative propulsion technologies have also become very important to solving the problem of foreign energy dependence. Like the United States, China must rely on foreign sources of energy to satisfy their growing needs. Pollution is also a significant problem. Many of the most polluted cities in the world are in China. You have a government that is very sensitive to the needs in this area and is promoting through regulatory mandates new energy technologies a) to invest in them and b) to mandate their use over time. You are going to see more and more focus on this. You asked about the role of China’s government. The new Minister of Science and Technology, Mr. Wan Gang, is a former automotive development engineer for Audi who worked on alternative propulsion technologies and is the first head of a Chinese government Ministry who attained that position for his industrial (vs. political) experience. In his time as Minister of Science and Technology in China, he has put a very high emphasis on the development of electric vehicles. I think China is going to take a rather strong role in this area. You have a country that has a need for reduced foreign energy dependence and for reduction of environmental pollution created by an increasing number of automobiles. China has a real need to take the lead in driving change in this area.
The China government’s willingness to invest in the infrastructure to support alternative propulsion technology will help drive demand side market acceptance. This is where I believe China has the opportunity to lead, and that will drive investment in new technology on the supply side. I believe the infrastructure must come first and this will drive supply-side innovation. It takes a combination of business and government working together to make such a transformational change possible – and nowhere in the world is there a closer link between business and government than in China.

China auto sales hit a record 1.11 million in March, exceeding US sales for the third month in a row. Given that increases in spending over Chinese New Year have passed, what’s now driving this growth and will it continue?
Chairman An: Everyone involved in China’s automotive industry is happy to witness that the auto sales volume of China exceeded that of America for the 4^rd consecutive month. Of course, this trend might be temporary. But, there is one thing we can be sure of: The record volume of auto sales this year is not only driven by high purchase demand during Chinese New Year. Therefore we shouldn’t say that the peak is over. This year, the auto sales increase in China is mainly attributed to the macroeconomic policy of China to increase and expand the domestic market. First, the economic development of China brings a higher demand for cars. Second, the new Stimulus Plan established very recently is working. The sales increase in 1^st quarter mainly comes from passenger vehicles (PV)- the enthusiasm of citizens on cars doesn’t decrease in 2^nd quarter so the sales of PV will keep at its fast pace. The launch of major infrastructure projects will help increase commercial vehicle (CV) sales in 2^nd quarter. Of course, affected by global financial crisis, export is still on the decline, which is a very difficult fact. Also take into consideration the fluctuating oil price and the fear of the H1N1 flu, and we can never be too optimistic. No one can forecast the market, but I am of the opinion that the development trend of the China auto market is still positive and Chinese auto will have a banner year!

Bill Russo: There are several factors driving this growth today. As Chairman An states, China has enacted a very significant stimulus plan that is proving to be more effective than what has been enacted in other countries. When we spoke a few months ago for our first interview, I talked about how you really couldn’t judge a full calendar year on the basis of the first few months because in China you’ve got a high volume that typically occurs around New Year – which is normally the case. You typically see a spike up before Chinese New Year and then a slow down in the ensuing months. That didn’t happen this year. This year, the peak in January was really a ramp up, because China continued to enjoy strong sales through the first Quarter and into April. In fact, the April sales were 1.15 million units. For four consecutive months China has outsold the US; the US only sold 820,000 units in April. Another interesting statistic is that the sale of sub-1.6 liter engines has grown by 56.5 percent year-over-year. This clearly indicates that the government stimulus plan is working. China focused their stimulus plan on encouraging the market to buy lower displacement cars. They reduced the tax on the purchase of vehicles below 1.6 liters by 5 percent and they also incentivized first time buyers and farmers- rural consumers- to come into the market with subsidies. They’re trying to shift this economy from an export-based to a domestic consumer-based economy. Targeting stimulus actions on low-displacement has the secondary effect of creating demand from entry-level consumers who tend to seek lower-priced vehicles – and this tilts the playing field toward local brands. In 2008, foreign brands held a 66% share of the market. In 2009, the Chinese government is targeting 40 percent share of the market for Chinese-branded vehicles. China’s stimulus plan is clearly designed to help local-brand manufacturers grow their domestic market share.

Stay tuned for Part II of this two part interview with Chairman An and Bill Russo, which will be published on Monday, June 1st. Many, many thanks to Bill Russo for participating in this follow-up interview and facilitating the component with Chairman An. Bill Russo has contributed his insights on the automotive industry for Newsweek, Straits Times, China Radio International, and the CBS Evening News, among other media outlets. He was also featured in a Q&A on this blog in February, which you can check out here and here. To learn more about Mr. Russo’s expertise and Synergistics Limited, his international business development advisory firm, please visit the company website.

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