KPMG-China Commercial Vehicle market

INDUSTRIAL&AUTOMOTIVEPRODUCTSChinaCommercialVehiclesMarket2006ADVISORY©2006KPMG,aHongKongpartnershipandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved.ChinastandssecondonlytotheUnitedStatesamongtheworld’slargestproducersoftrucks,busesandothercommercialvehicles.Yetdespitethisfact,itisonlynowbeginningtomakeitsmarkasasignificantexporter.Thischangewillcontinueinthecomingyears,asanumberofdomesticmanufacturersexpandtheirsalespushfromsecondtiermarketsintheMiddleEastandAfricatothemorelucrativeanddemandingmarketsofWesternEurope,NorthAmericaandJapan.Thisexportdrivewillalsocreatenewopportunitiesforforeigninvestors.Notwithstandingahandfulofjointventures,foreigncompanieshavetendedtoshyawayfromthecommercialvehiclessector,assumingitcannotmatchtheprospectsforpassengervehicles.Theperceptionisthatthesectorismorefiercelydrivenbypriceandmorepronetoregulationandgovernmentintervention.InfactChina’scommercialvehiclesectoralreadyofferssomeexcitinginvestmentopportunities,ifinvestorspicktherightstrategiesandsegments.Priorto2004thecommercialvehiclesectorenjoyedseveralyearsofrobustgrowth.Inparticular,heavytrucksattractedagreatdealofinvestmentfrombothdomesticandoverseasmanufacturers.Salesofcommercialvehiclesslowedin2005,buthavereboundedin2006.Themarketisheadingbackontoalongtermgrowthtrack,withthepotentialforfurtherindustrydevelopments,andincreasedexports,toshapeinvestmentopportunities.Keyfindingsinthisreportinclude:•China’scommercialvehiclesectorisgrowingagainafterashort-livedslowdownin2005.Inmanyrespectsitremainsonamorestablefootingthanthepassengervehiclesector.•Thesectorwillmostlikelycontinuetobedominatedbydomesticmanufacturersandbrands.•ExportsofcommercialvehicleshavebeenlimitedinthepastbutarelikelytobecomeakeyindustrydriverasChina’smanufacturerscanexploitcertaincompetitiveadvantages.•Withinthedomesticsectorthereissomepressuretoconsolidate,althoughsomeloss-makingstate-ownedenterprises(SOEs)maysurviveoverthemediumtermwithlocalgovernmentsupport.•Asthedomesticsectorcontinuestoupgradeitsproductsandtechnology,therearecontinuedopportunitiesforforeigninvestmentincomponentsandthedevelopmentofautomotivetechnologies.Wehopethisreportwillhelptoprovidesomefreshinsightsonthislargeandgrowingareaoftheautomotiveindustry.PaulBroughHeadofFinancialAdvisoryServicesKPMGinChinaandHongKongSARSeptember2006China’scommercialvehiclessector:EnteringtheexporteraChinaCommercialVehiclesMarket2006©2006KPMG,aHongKongpartnershipandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved.ContentsMarketoverviewCompetitivelandscapeIndustryopportunitiesThewayforwardAppendixContactus3812181920ChinaCommercialVehiclesMarket2006©2006KPMG,aHongKongpartnershipandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved.Worthasecondlook?Thespectaculargrowthinpassengercarmanufacturing,accompaniedbyintensecompetitionamongforeignanddomesticoriginalequipmentmanufacturers(OEMs),providesoneofthemostcompellingbusinessstoriestocomeoutofChinainrecentyears.Thisgrowthhastendedtoovershadowtheparalleldevelopmentinthemarketforcommercialvehicles.Thelevelofunderstandingofthissector,particularlythedistinctionbetweensegmentsandbusinessmodels,remainsfarlessadvanced.Withmorethan2.5millionvehiclessoldin2005,Chinaisthesecondlargestcommercialvehiclemarketintheworld,behindtheUnitedStates.Forselectedsegmentssuchasheavytrucksandlargebuses,Chinaisalreadythelargest.Chinahasalsobeenoneofthefastestgrowingmarketsinrecentyears.Thecommercialvehiclesectorexperiencedacompoundannualgrowthrate(CAGR)ofmorethan10percentperyearbetween1997and2005,whileothermajormarkets,includingtheU.S.,JapanandCanada,haveexperiencedsloworevennegativegrowthduringthesameperiod.1MarketoverviewMajorcommercialvehiclemarkets(2005)GrowthofthecommercialvehiclesmarketRealGDPgrowthChinaCommercialVehiclesMarket2006©2006KPMG,aHongKongpartnershipandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved.JapanUnitedStatesnSpainnCanadanMexicoChinanBrazilnFranceThailandnGermanyIndiaNote1:Sizeofbubbleconstitutesthenumberofcommercialvehiclesproducedbyeachmarketin2005Note2:Includesallbusesandtrucks(large,medium,smallandmini)Source:InternationalOrganisationofMotorVehicleManufacturers,EconomistIntelligenceUnit,July20060%2%4%6%8%10%12%-2%-5%10%0%5%10%15%20%1InternationalOrganisationofMotorVehicleManufacturers,June2006Severalwell-knownforeignmanufacturers,notablyVolvo,MANandIveco,haveformedjointventures(JVs)withdomesticcompanies.AswithotherautomotiveandmanufacturingJVs,theforeignparticipationinthesedealswassubjecttoa50percentownershipcap.Afteranumberofyearsofsteadygrowth,salesofcommercialvehiclesinChina–bothtrucksandbuses–dippedin2005.Theslowdownwasblamedongovernmentausteritymeasureswhichsoughttodiscourageoverinvestmentinfixedassets.Salesofcommercialvehiclesstartedtorecoverinthefirsthalfof2006,withallt