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Quest for 'balance of power' in the market
Automotive Foresight (Shanghai) Co. ,Ltd.   2013-05-07 10:28:49 Author:Yale Zhang Source:China Daily Font size:[Large][Middle][Small]
Updated: 2013-04-20 07:20 (China Daily) By Yale Zhang
Strong getting stronger, but is that truly healthy?  
Though militarily weak, the Song Dynasty (960-1279), was able to sustain its empire among stronger neighbors for more than 300 years through a unique diplomatic strategy that played nomadic northern armies off against each other. The strategy was again proposed by advisors in the late Qing Dynasty (1644-1911) as it weakened under invasions by industrialized Western powers. To balance one power against another was optimistically believed to somehow save the empire. Some royal officials and scholars also proposed the strategy of "learning from foreign powers to compete with them". But time ran out before the idea could be fully implemented.
After the Qing Dynasty collapsed in 1911, the phrase "balancing foreign powers" became a derogatory term different than its original meaning when created 1,000 years before. The dynasty failed for many reasons, but the failure itself does not prove the folly of the strategy. Instead, it was probably the best available approach that a weak government could use. 
A similar dynamic has arrived in China's auto industry. From many angles, domestic producers were in a weak position in the 1980s and 1990s - and to a large degree even now - battling a competitive landscape similar to that faced by the Qing. The famous market opening-up in exchange for technology is but a modern edition the strategy, though how much domestic players have learned remains a big question mark. But at least it marked a starting point for indigenous brands to begin assembly, supply chains and training of talent. Yet due to their ownership structure, some State-owned carmakers lack the basic motivation or willingness to learn from their joint venture partners, to some extent crippling the strategy. That doesn't mean that policymakers had major flaw in their version of balancing international competitors - a de facto "playing off" strategy.
Ridgeline forms
But three years after China became the world's largest car market in 2009, a ridgeline formed in the industry and market. After years of effort, the top three automakers - Volkswagen, General Motors and Hyundai/Kia - started to show even stronger momentum in 2012 as they captured bigger market share. Today their cars monopolize the list of the 10 best-selling models in China. This kind of competitive landscape was new in the 30 years following the opening of the auto market in the early 1980s. The top-selling model alone delivered 276,000 units in 2012, almost half the total number of cars sold in the country in 1997.
Meanwhile, in September of 2012, the China-Japan territorial dispute over the Diaoyu Islands resulted in a drastic drop in Japanese car sales. Most of the major Japanese manufacturers - Toyota, Nissan and Honda - saw their sales halved in the fourth quarter of 2012. Though they rebounded a bit in the first quarter of 2013, it looks like it will be very hard for them to match the growth pace of other major global competitors this year. The market has finally begun to consolidate, with the strong getting stronger and weak becoming weaker, though that might not be what the top economic planning body, the National Development and Reform Commission, expected or planned. 
For many, it is now surprising that no Japanese carmaker ranks among the top three. Industry insiders would consider Toyota and Nissan two strong candidates. But of course the most worrying aspect is the weak performance of so-called "indigenous brands". The market share for local brands has dropped from a peak of 33 percent in 2010 to less than 29 percent of total passenger vehicle sales - including sedans, MPVs and SUVs - sliding further away from the NRDC's target of 40 percent. Their share did climb a bit in the last quarter of 2012, partly due to the decline of Japanese brands and partly from a push by local automakers to boost production based on their over-confidence in grabbing the market share lost by Japanese brands. It indeed helped local carmakers, but only in the short term or at most for the middle term.
True winners
The tough question is if the Japanese carmakers decrease very quickly, what companies will benefit over the long haul? The true winners will likely be other top global competitors. At the current stage, there is no way local carmakers can compete with top international brands. And when the big automakers become more dominant in the marketplace and achieve super-high economies of scale in production, can local carmakers still have chance even in the middle and lower-end segments? The answer is no, especially when some State-owned carmakers do not have strong motivation in "learning from foreign powers" and some local private carmakers have no international partners to learn from. In other words, fast shrinking market share for Japanese carmakers does not look like it fits the "balancing powers" strategy. And it might not be in the best interest of local carmakers either.
Japanese companies have the product and quality that all other global automakers have to worry about. It makes the other global companies pay more respect to the market and consumers. Because humility is still important in the strong.
A good example was when Toyota developed too fast in the US market and realized that could backfire. The company decided to slow down and help competitors, supplier partners and even non-automotive companies by sharing their experience with production and quality control. The gestures gained more friendly treatment from the consumers and society, helping Toyota's long-term sustainable development.
Industry supervisors have to consider whether the "balancing foreign players" strategy still works if Japanese carmakers drop too quickly.
For dominant automakers in China today, it might be a good idea to truly understand the two strategies and histories - and stay humble like Toyota did in the US.
The writer is the managing director of Automotive Foresight (Shanghai) Co Ltd. He can be contacted at yz@autoforesight.com.
(China Daily 04/20/2013 page32)

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