China to drive global auto profits

Consulting firm McKinsey & Company predicts that profits for global automotive companies will increase by about 50 percent by 2020, and that half of this growth will come from China, according to a report released Monday.

The report states that total profits in the automotive sector in 2020 will increase by about 25 billion euros ($33 billion) to 79 billion euros, a jump of almost 50 percent from 2012. And two-thirds of this profit will come from emerging markets, including China, Russia, India and Brazil, with China being the major driving force, according to the report.

McKinsey predicts the Chinese market will account for about 13 billion euros of the profit increase, and other emerging markets will contribute around 6 billion euros.

The established markets, including America, Europe and Japan, will account for the remaining 4 billion euros, said the report.

The automotive industry has recovered from the financial crisis, as the 2012 profit of 54 billion euros for the whole sector has surpassed the profit amount of 41 billion euros in 2007 - the year before the crisis, the report said.

Axel Krieger, a McKinsey partner, believes that the Chinese government should loosen its protectionist policies for the automotive industry in a bid to ensure market competition. Only in this way, he said, can Chinese automakers improve themselves in order to be able to compete with international companies.

The McKinsey report also pointed out some potential growth opportunities in the Chinese automotive industry, such as auto-financing and after-sales service.

Compared with the US where many chain stores provide after-sales service, most Chinese customers still face limited after-sales choices of either expensive dealers or unreliable small repair shops, Gao said.

Meanwhile auto-financing is a major profit source in established markets such as the US. While it is still new in China, as Chinese banks and customers are putting more attention on personal consumption loans, the auto-financing sector has great potential, according to Gao Xu, senior partner at the consultancy.

Gao said that as China is a major automobile market, Chinese automakers should continue to introduce advanced technology to reduce the gap with their international competitors.

Gao said that Chinese automotive brands are relatively weak in technology so they should cooperate with each other and the industry will likely witness more mergers.

Some industry observers are skeptical about this.

Cooperation should be carried out between two strong companies, but Chinese automotive companies are still lacking advanced technology so most local automakers do not currently have the capability to foster effective cooperation, Wu Shuocheng, editor in chief at Shanghai-based automotive website auto.gasgoo.com, told the Global Times on Monday.