Important to map the road to the future

Seismic changes in China's car market will be felt around the world and not just by the multinational automakers

After more than 30 years of rapid and continuous growth, China's automobile market has reached a historic inflection point. Auto manufacturers are staring at a new reality in which sales are on the decline and market fundamentals are shifting from the manufacture and sale of internal combustion engine cars to the pioneering of next generation mobility experiences and technologies.

Despite the downturn, however, there is substantial growth potential in China, albeit at a slower rate. Auto sales enjoy better margins in China than elsewhere. The country also represents 30-40 percent of sales and a higher share of profits for major multinational brands. In other words, China is still the golden goose.

However, the ongoing slowdown in vehicle sales is cause for concern not only for the auto industry's stakeholders, but also for global workers and policymakers, who rely on a strong Chinese auto market to provide millions of people with direct and indirect employment.

The global auto industry is undergoing a game-changing transition to autonomous, connected, electric, and shared vehicles and solutions, which offer significant potential for future revenue growth, but the road to profit is as yet unclear and both Chinese and foreign automakers face significant performance pressure in the race to keep pace with investment and innovation.

As the world's largest auto manufacturer and consumer, China will be a major battleground in the new phase of automobile innovation. For multinational original equipment manufacturers operating in China, the years of reliable double-digit volume and profit growth are likely gone forever. There are five key areas where a rethink is required to maximize the contribution of a multinational brands' China operations to its global business:

First, multinational carmakers can position China as an auto innovation hub. The country is already the world's largest and most diversified market for electric vehicles, and the government intends to foster global leadership in smart car development and production by 2035. China is also likely to become the world's largest market for autonomous vehicles, and fully autonomous cars (SAE Level 4 and above) could see mass deployment in China within the next 20 years.

Global, non-China-specific autonomous driving solutions are likely to struggle in China, which presents a unique set of road conditions and driving behavior. Multinationals must thus maintain a deep developing commitment to the China market.

Moreover, Chinese consumers are more sophisticated and demanding about digital technology. Automakers and their technology partners will thus have to leverage China's advanced digital ecosystem to bring about market-leading innovations in vehicle connectivity.

To boost global competitiveness, multinationals should position their research and development centers in China as drivers of cost-competitive solutions for international markets, rather than just the Chinese market.

Second, global automakers operating in China can help China become a world leader in the creation of new retail experiences. By leveraging both digital and data analytics to suit the relatively fluid regulatory environment in China, innovative retail business models could help change the current practice of directly adopting the 4S(sales, service, spare parts, and surveys) distribution model that is prevalent overseas. This one-size-fits-all model is costly and therefore it is time to replace it by a retail business model tailored to Chinese consumers' needs.

Third, China is an enormous country with many regional differences. Multinational auto companies could benefit by adopting a more granular approach to their China operations given the differences in consumer preferences and market conditions around the country. Local factors, including different attitudes to media consumption, purchase channels, and brand choices, should be considered in product development and network planning. Creating differentiated marketing campaigns and giving local sales and service organizations greater autonomy also has the potential to increase sales.

Fourth, foreign cars have historically sold for higher prices in China compared with other markets because of import tariffs, strong consumer interest and weak domestic competition. Multinational original equipment manufacturers (OEMs) have consequently enjoyed the freedom to price models by summing up component costs and adding margin. But this approach is coming under strain in the current environment. Looking ahead, OEMs should shift toward setting competitive prices, deducting margin and working toward achieving the required cost saving. This would entail a reassessment of their China organizational model, including a review of products and administrative cost structures. This in turn would ensure that cost competitiveness does not suffer in the event of Chinese rivals launching high-quality, lower-priced challenger models.

Fifth, China will remove its caps on foreign ownership of car companies in 2022, allowing automakers to own their Chinese operations outright instead of partnering with domestic companies. So foreign auto companies should review their existing collaborations and modify their joint ventures in accordance with their strategic goals. Options on the table include exploring new models of collaboration, such as contracted production, and joint development or sourcing partnerships, instead of traditional equity joint ventures.

The global auto industry is going through a difficult period, and so is China. However, there is no reason why foreign automobile companies cannot use this transitional period as an opportunity to reposition and benefit from what we believe will be a second phase of sustained growth.

The key will be to make astute changes to organizational structures, while sharpening their commitment to the China market. The rewards for those who succeed will surely be substantial.