PAUL GAO The McKinsey Quarterly, 2002 Number 1
Faced with the prospect of stagnant global sales over the next 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 pursued 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 do best—developing products and brands—while 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 manufacturing 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 resource. 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 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, compared with 250 in Taiwan and more than 500 in Germany and the United States. But demand—promoted 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 (Exhibit 1).
