Industry Drama Abounds as Automakers Set Sights on China

Source: AFP/Getty Images
Source: AFP/Getty Images

As the Chinese auto market becomes the freshest and potentially most profitable region outside of North America, clashes between manufacturers and regulators are creating some interesting developments.

First out of the gate, a high-ranking Chinese government official has been accused of taking bribes in connection with Japanese auto giant Toyota. Liu Tienan, who is a senior member of the National Development and Reform Commission, is accused alongside his son of taking approximately $5.8 million in handouts from Guangzhou Automobile Group Co., which is engaged in partnerships with Toyota. Auto News reports that Teinan is accused of having received bribes for a decade, between 2002 and 2012, all in order to help Guangzhou secure favorable regulatory approval to build projects for Toyota, and also to help streamline the opening of a Toyota dealership.

On top of the money, Tienan’s son was allegedly also given a job at Guangzhou with a salary of $1.2 million, even though he didn’t actually do any work. Tienan’s defense lawyers have said that the accusations don’t really have much standing.

Yet, Tienan’s case is not unusual within the Chinese business world. China’s president, Xi Jinping, has been cracking down on corruption in a major way, and has been sweeping through all of China’s largest cities and individual provinces. Foreign companies operating within Chinese borders haven’t been immune to prosecution and punishment either. Recent reports suggest that Jinping’s efforts could generate as much as $70 billion for the government, and also help boost economic growth.

This is only the beginning of the drama playing out in the Far East, as China has seemingly become more akin to the wild, wild west — particularly within the auto industry. China, the world’s most populous country, is home to 1.35 billion people. From a business standpoint, this presents the world’s largest potential customer base. And automakers would love nothing more than to put all of those people behind the wheel.

Source: Getty Images
Source: Getty Images

If analysts prove to be correct, then automakers will get their wish. A recent report from Yahoo! says that the Chinese market will likely continue to drive auto sales for the next 12 to 18 months, meaning big potential profits for car companies. One disappointing caveat for U.S.-based manufacturers, however, is that American vehicle shipments are expected to slow down. 

Moody’s Investor Service set expectations of light vehicle sales to increase 3.2 percent this year, and three percent next year. The forecasted growth for the Chinese sector alone has been set at around 8 percent. “China continues to be the main buyer of light vehicles; its share of that market is set to rise from 27% this year to 28% in 2015,” said Bruce Clark, a Moody’s analyst.

So what about those American cars? Moody’s expects shipments to China to hold at 4.3 percent for 2014, but to scale down to a measly 1.5 percent next year. “Shipments from the US will moderate as the supply of used cars rises, as an increasing number of vehicles come off lease. Used car prices will drop as a result,” Clark added.

Despite the slowing down of light vehicles made by U.S. manufacturers getting shipped to Chinese markets, the luxury segment seems to be picking up steam. One American manufacturer that is expecting big results in China is luxury electric automaker Tesla, which is reportedly doubling its Hong Kong workforce and expanding operations. Although still rather small, Tesla’s total Hong Kong team will include more than 100 employees by the beginning of 2015.  

One particularly attractive aspect of Hong Kong for electric vehicle makers like Tesla is how compact and dense the city is. At only around 10 miles wide, customers driving Tesla models would only need to charge their vehicles once per week, Bloomberg reports. “Hong Kong could potentially be the place to showcase the success of electric vehicles to the rest of Asia,” said Veronica Wu, vice president for Tesla’s China operations in a statement. “We want Hong Kong to be the Norway of Asia. The Hong Kong Government is very open to the idea of electric vehicles and very committed to supporting sustainability.”

Cadillac Logo
Source: Cadillac

While Tesla CEO Elon Musk hopes to see Chinese sales of his vehicles match his American numbers in 2015, another luxury automaker is also expecting big things.

Again, Auto News brings us a report that General Motors is expecting a significant jump in sales for its Cadillac brand. Forecasts say a 40 percent increase is expected as the company expects to deliver up to 70,000 Cadillac models to China before the end of 2014. As of the beginning of September, Cadillac has sold just under 46,000 vehicles. For 2015, GM is hoping that Cadillac can top the 100,000 mark in total sales.

“We’re very optimistic about the luxury market, we believe that the luxury market by 2016 here will become the largest luxury market in the world, surpassing even the size of luxury in Europe,” said GM’s China President Matt Tsien. “With Johan, we have somebody that really is an executive that understands luxury, but he also is very, very keen on understanding what do we need here in China for Cadillac to be successful.”

Johan, of course, refers to Johan de Nysschen, the man hired away from Infiniti to head up Cadillac’s re-branding efforts. All of this comes on the heels of GM’s announcement that the Cadillac brand would be hitting the bricks and moving to New York City, in an effort to be closer to competitors and put themselves in the limelight. General Motors has put a lot of resources behind its attempt to resurrect Cadillac as one of the world’s premiere luxury car makers, and if recent victories in China are any indicator, they may be on the right track.

China may be the next big market for automakers, especially in the luxury segment. But manufacturers will need to ensure operations are free from any issues, given the Chinese government’s crackdown on corruption.