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1、Global carmakers could manage their costs and capital in Chinaand gain a strategic option for their global operationsby contracting out the manufacture of whole vehicles to Chinese companies. PAUL GAO The McKinsey Quarterly, 2002 Number 1 Faced with the prospect of stagnant global sales over the nex
2、t five years, the world 抯 biggest carmakers are jockeying for a share of one of the few buoyant national markets. China 抯 domestic car sales, growing at more than 10 percent annually, will probably account for 15 percent of global growth over the next five years. So far, global automakers have pursu
3、ed successful joint- venture strategies by investing heavily in assembly plants operated by Chinese partners. But as competition in China heats up, a new tack may be needed in the quest for profitable market share. An asset-light strategy would have the major auto companies concentrate on what they
4、do best developing products and brandswhile contracting out not just component supply but also the whole assembly process to Chinese automakers that can capitalize on competitive cost structures. Although scaling back capital investment in such a healthy market might seem bold, outsourcing manufactu
5、ring is neither uncommon in other industries nor entirely unprecedented in this one. Moreover, the nature of the Chinese auto industry and market makes outsourcing particularly attractive. Outsourcing might also help Chinese automakers take their first steps to becoming a global manufacturing resour
6、ce. But if the strategy is to work, global carmakers must build up the skills of these Chinese partners, which in turn must embrace contract manufacturing as a more profitable path to creating a globally competitive industry than launching their own brands. COMPETITION IS ABOUT TO HEAT UP With sales
7、 of 2.1 million-plus units in 2000, China buys more four-wheeled vehicles than all but six other national markets, yet its passenger car market is still in the early stages of growth. Indeed China, with only 600,000 car sales a year, has fewer than 10 passenger cars on the road per 1,000 people, com
8、pared with 250 in Taiwan and more than 500 in Germany and the United States. But demandpromoted by better roads, new sales and distribution channels, the deregulation of the auto market, and China 抯 entry into the World Trade Organization (WTO)will increase as the country 抯 economy continues to grow
9、 (Exhibit 1). The dominant production and sales joint ventures between global and local companies have the best position for meeting that demand. Only 15 years after Volkswagen entered the market, more than half of the passenger cars sold in China roll out of VW 抯 Changchun and Shanghai joint ventur
10、es. Other foreign joint ventures account for nearly all the resta further 43 percent (Exhibit 2). In the shadow of these foreign alliances, 20 domestic carmakers share just 3 percent of the market. As global companies focus more and more on China, local manufacturers will do well to hold even that m
11、eager share; they concede too much ground in R Ford Motor has set up the company 抯 first passenger car joint venture; and BMW has announced that it is discussing with Brilliance China Automotive the possibility that the Chinese company might assemble its 3-series and 5-series models in China. What i
12、s more, these global carmakers are planning, for the first time, to introduce new models and upgrades in China within months of their launch in more mature markets. This development will surely end the reign of the VW Santana, a 1970s-era model that has long been out of production elsewhere but, off
13、ered without even a facelift for over 15 years, is China 抯 best-selling car. China 抯 entry into the WTO will cut import tariffs drastically, heightening pressure on local producers (Exhibit 3). It will also allow global carmakers to own businesses in which they have unmatchable advantages: sales, se
14、rvice, and distribution, as well as loan services to car buyersservices that are sure to be welcome in a market where personal credit is scarce. For global brands, the strategic issue is no longer whether to enter the market or how to compete with Chinese companies but rather securing or consolidati
15、ng profitable market share. For Chinese automakers, this means that their ambitions will increasingly depend on the strategies of those global companies. THE NEED FOR AN ASSET-LIGHT STRATEGY Competing in China involves big money: a capital investment of $1.5 billion for GM 抯 Shanghai plant alone, fo
16、r example, as well as $1.7 billion for the two facilities of VW 抯 joint ventures. Thanks to protection of the industry, this investment has largely paid off: with tariffs ranging from 80 to 100 percent, models bear price tags up to 150 percent higher than those in the United States and Europe, allow
17、ing successful joint ventures in China to enjoy levels of profitability not seen anywhere else. For each Honda Accord, to give one example, Honda 抯 Guangzhou joint venture makes over $3,000 in net profit, three times the net profit for a comparable US model. But greater competition is already squeez
18、ing those margins. Even with technology upgrades, the list price of the standard Santana fell by 25 percent, to 115,000 ren min bi ($13,850), in the five years up to October 2001. As tariffs fall, so will prices. Meanwhile, sales and marketing costs will rise in a more competitive market, and more f
19、requent model upgrades mean that heavier investment will constantly be needed to retool assembly plants. This scenarioglobal companies stuck on a direct-investment treadmill as financial returns become more uncertainhas been played out in much of the world. China, which almost alone among new market
20、s has its own very large auto industry, offers a point of departure. For the global carmakers, pursuing an asset-light strategy would involve contracting out the manufacture of vehicles to Chinese-owned production companies. If they can meet this demand for production, as Chinese firms have done in
21、other industries, their global partners would reap a number of advantages. First, the global carmakers would retain the continuing advantages of Chinese production: the ability to overcome whatever nontariff barriers to imports (such as quotas and licensing restrictions) survive China 抯 entry into t
22、he WTO, as well as cheaper labor, reduced freight, and local- government concessions. And the global companies would gain these advantages with lower financial risk than they would bear if they tried to produce cars themselves. Second, there are the direct benefits of contracting out. Global automak
23、ers in China could employ up to 40 percent less capital, which promises a corresponding 60 percent increase in their return on capital. Alternatively, contracting out would free up funds that could be concentrated on the higher-value skills of product development and design, and sales and marketing.
24、 It would also enable global companies to pursue those parts of China 抯 embryonic after-sales marketretail financing, leasing, servicing, repairs, spare parts, and rentalsopen to them after China 抯 WTO entry. In developed markets, these activities generate 57 percent of the industry 抯 profits, yet t
25、here are few established players in China (Exhibit 4). Finally, indirect benefits would flow to the global carmakers from the increased specialization and scale of the Chinese contractors, whose chief advantage is that they can develop and use their expensive technology and capacity to serve more th
26、an one customer. Given the size and automation level of the relevant assembly plants in China, doubling a plant 抯 output would translate into a 5 percent savings in unit costs. Ultimately, global brands may draw on this Chinese resource to supply other markets with good-quality, competitively priced
27、 cars, which would in turn build the scale of Chinese factories to an optimal cost-reducing level. In many ways, this asset-light strategy would mimic the success some global automakers have had with recent sales and distribution initiatives. Since mid-1999, dealers of Audi, GM, and Honda cars have
28、invested more than $250 million in facilities and other infrastructure in China. Audi exemplified the successful implementation of this strategy when it became heavily involved in developing the sales and management skills of Chinese firms, but without investing capital in the process. The company t
29、ook more than a year to select its 32 dealers, seeking entrepreneurs from the auto industry and elsewhere who were market oriented, ambitious, and able to finance their own premises and growth. Contracting out something as fundamental as product manufacture always raises the specter of “creating you
30、r own competition.“ Companies that adopt the asset-light strategy naturally hope that the manufacturers they nurture won 抰 eventually beat them at their own game. Although little is certain in business, global car brands can find much to allay their concerns. In the car industry, it is skills in des
31、ign, brand marketing, and distribution, as well as a very few key components, notably high-performance engines, that help companies earn their competitive position. Their profits flow from sales, service, finance, and leasing. Outsourcing assembly doesn 抰 force companies to transfer their skills in
32、any of these key areas, nor should it put such advantages at risk, which is why companies like Cisco Systems, Hewlett-Packard, and IBM feel secure in outsourcing the manufacture of most of their high-end hardware systems. MAKING IT HAPPEN Contracting out production isn 抰 altogether novel for global
33、carmakers: Valmet, in Finland, makes some Porsche Boxsters; Karmann, in Germany, makes convertibles for both Mercedes-Benz and VW. These successes show that, even in quality markets, customers care more about the styling, performance, and after-sales service of strong brands than about which company
34、 actually produced the car. Moreover, successful local automakers such as SAIC (Shanghai Automotive Industry Group Corporation) are already all but contract-manufacturing for GM and VW, for the Chinese companies are totally responsible for the quality of their output, drawing on their global partner
35、s?technology and management talent as required. GM and VW, however, have invested heavily in these plants as equity partners. Contracting out manufacture requires a further degree of separation. For contracting to succeed in China, two conditions must be met. First, the local component-supply indust
36、ry will have to complete its current journey of consolidation and improved quality to meet the quantity requirements and specifications of global models. Second, global companies should continue transferring technology and management skills to selected Chinese plants. Most global companies realize t
37、hat a strong local supplier base is needed to manufacture cars at competitive cost and quality. Local components escape import duties, and though they will decline under the WTO regime, the other advantages of local production remain, particularly lower freight costs and faster supply. Competition a
38、nd quality in China 抯 component-supply market are already rising. Every one of the top ten global automotive suppliers had set up shop in China by the end of 2000, and many are exporting components to Europe and North America. Consolidation is being driven by China 抯 shift to global models, by the t
39、endency of Chinese companies to outsource their own component manufacturing, and by supportive government policies. Yet global automakers could do more to help. One way would be to go on matching local capacity with international expertise, as Volkswagen has done so successfully with its joint-ventu
40、re partner SAIC, its international first-tier suppliers, and the Shanghai local government, which aims to make autos a core local industry. Automakers might also insist that their dealer networks sell only branded, quality-assured spare parts rather than the counterfeit local products that now make
41、up over 50 percent of all aftermarket supplies. But a strong local component industry is only half of the picture, for if global automakers are to rely on local manufacturing, they will have to support efforts to increase the quality and scale of Chinese assembly plants. Further capital investment,
42、even if available, isn 抰 required; instead, the global companies can inject technology and management expertise into plants that are already being consolidated. BMW 抯 developing relationship with Brilliance China Automotive is a good example. Brilliance hired Italdesign, Giorgetto Giugiaro 抯 firm, t
43、o design the company 抯 proposed Zhong Hua passenger car and was building plants and training workers to manufacture it. Instead of seeing Brilliance as a competitive threat, BMW sent out its own engineers and technicians to help the Chinese company not only in building the assembly line but also in
44、training workers, engineers, and managers in processes and quality control. If Brilliance proves itself with the Zhong Hua, BMW will give it the go-ahead to assemble the company 抯 3-series and 5-series models for the East Asian market at its new Shenyang plant. Toyota 抯 relationship with Tianjin Xia
45、li is an alternative approach to building up Chinese skills to mutual advantage. In 2000, Toyota licensed Tianjin to produce a car, marketed as a Tianjin Xiali, that was based on the Japanese Toyota Platz/Vitz compact (known as the Toyota Echo in the United States). In this way, Toyota receives reve
46、nue from the license and from car kits and components while building up Tianjin 抯 abilitiesall without risking the Toyota brand. Toyota also announced a joint venture with Tianjin to build an all-new model, to be sold later this year, that will bear the Toyota brand. Although Toyota Tianjin is a joi
47、nt venture, the same staged approach could be taken to wholly outsourced manufacturing. As in all such arrangements, contracts must enhance the parties?mutual dependence: the global buyer suffers if the Chinese plant can 抰 meet production schedules, just as the plant suffers if the global buyer does
48、n 抰 order sufficient volume. Global automakers will also need to protect their intellectual-property rights and product quality standards, though reputable Chinese assemblers now realize that their lucrative global manufacturing contracts will be at risk if they attempt to appropriate their partners
49、?intellectual property or fail to meet quality standards. THE OUTSOURCING OPTIONS For global brands with a smaller market share or a lower level of capital investment in China, asset-light manufacturing is most obviously relevant, because it gives them an opportunity to leapfrog the competition by using capital more efficiently. But the bigger players in China could also work with this strategy. First, heretical though it may sound, proven joint-venture facilities can offer their manufacturing capacity to other brandsa strategy that has been used successfully at the GM and Toyota
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