20170510-三星证券-Competition_with_local_players_in_China_intensifying_46页_1mb

Sector Update Summary

Core Content

This report provides an analysis of the automotive sector in China, focusing on Hyundai Motor (HMC) and Kia Motors' challenges in the market, alongside insights into the competitive landscape and strategic considerations for long-term survival.

Main Points

• Market Intensification: The Chinese auto market has become one of near-perfect competition, with rapid product launches and technology adoption.
• Consumer Polarization: Chinese consumers are divided into two groups: those who prefer high-end brands like Mercedes-Benz and Tesla, and those who prioritize cost-effective options such as Geely and Great Wall.
• Price Pressure on Foreign Brands: HMC and Kia are struggling due to declining sales, partly due to the lack of price premiums and stronger competition from local firms.
• Strategic Adjustments Needed: To recover, HMC and Kia need to cut prices and accelerate model launches, especially in 4Q 2017. Long-term, they may need to reposition brands, increase joint venture stakes, and use Chinese plants as export bases.
• Utilization Concerns: Low utilization rates at HMC's fourth and fifth plants in China and Kia's third plant are a major concern.
• Government Policy Shifts: The Chinese government plans to relax the 50% cap on foreign ownership in joint ventures, signaling confidence in local automakers and aiding their global expansion.
• Impact of Political Tensions: Political issues, such as the THAAD dispute, have affected HMC and Kia's sales, but the effect is less severe than the 2012 Senkaku Islands conflict on Japanese automakers.
• Cost Structure Differences: Local automakers benefit from lower wages, government support, and a cost concept that ignores fixed costs, allowing them to offer more affordable vehicles.

Key Information

Company Performance in China

Sales Forecasts (Units)

Equity-Method Gains (KRWb)

Chinese Market Dynamics

• Consumer Trends: Chinese consumers are more selective, with a growing preference for high-quality, affordable vehicles.
• Local Competitors: Local automakers like Changan, Great Wall, and Geely offer competitive designs and technology at significantly lower prices than joint ventures.
• EV Subsidies and Tariffs: EV subsidies in China are substantial, while import tariffs on foreign models (e.g., Tesla) affect their competitiveness.
• Export Plans: Chinese automakers are expanding into emerging markets, including Eastern Europe, Russia, and Brazil, to diversify sales and achieve economies of scale.

Strategic Recommendations

• Short-Term: HMC and Kia should cut prices and launch new models earlier than planned in 4Q 2017 to restore sales.
• Long-Term: Strategic changes such as repositioning brands, increasing joint venture stakes, and using Chinese plants for exports are essential for long-term survival.
• Supplier Relations: Local automakers have different supplier relationships, often not compensating for development costs, which affects their pricing strategy.

Conclusion

The Chinese auto market is highly competitive, with local firms gaining ground due to cost efficiency and government support. HMC and Kia are facing significant challenges in this market, requiring both short-term price adjustments and long-term strategic realignments. The government's policy shift towards relaxing joint venture ownership caps is expected to support local automakers in their global expansion efforts, which could further intensify competition for foreign brands.