Staffers roll out a concept electric car developed by Chery during the Beijing Auto Show in May. Photo: CFP

Domestic auto brands have benefited from a much-needed respite from the cutthroat competition in the Chinese car market over the past two months, and have regained some lost territory.

Chinese automakers sold 585,600 passenger vehicles in October, surging by 17.5 percent year-on-year, and their collective market share also climbed back again by 4.3 percent from a year earlier to 45.1 percent, after an increase of 3.1 percent year-on-year in September, the China Association of Automobile Manufacturers (CAAM) announced November 9.

From January to August, domestic brands' market share declined by 2.4 percent year-on-year to 40.3 percent.

"Because the resurgence began in September, it has much to do with the serious setback the Japanese brands have suffered in China [since the Sino-Japanese Diaoyu Islands dispute]," Zeng Zhiling, director of LMC Automotive Asia Pacific Forecasting, told the Global Times Tuesday.

Premium Japanese brands, such as Toyota, Honda and Nissan, have yielded their market shares to Volkswagen, General Motors and Ford Motor Company in the world's largest car market, where the market shares of second-tier, lower-priced Japanese brands, including Suzuki Automotive, Mitsubishi Motors and Mazda Motor Corp, have been grabbed by Chinese domestic brands, Zeng said.

Japanese carmakers together sold only 98,900 passenger cars in October, down by 59.4 percent year-on-year, and it was the first time since 2009 that their collective monthly sales in China dropped below 100,000 units, the CAAM said. Their collective market share in the country plummeted by 12.3 percent year-on-year to 7.6 percent.

Meanwhile, among the foreign passenger carmakers in China, the Germans gained the most from their archrivals' misfortune, selling 280,700 units in October, boosting their collective market share in China to 21.6 percent, and leading their US, South Korean and French peers, CAAM figures showed.

Black swan

After the anti-Japanese protests broke out in China and facing political uncertainties, Japanese carmakers and their parts suppliers scaled back investment plans amid slumping sales in the country, Bloomberg News reported Tuesday.

Koito Manufacturing Co, a headlight supplier to Toyota, has indefinitely frozen a plant project, and Japanese parts makers Sumitomo Electric Industries and Toyo Tire & Rubber Co are also reconsidering their plans to expand in China, the news report said.

The negative impact on the Japanese companies' sales in China due to the territorial dispute is unlikely to mitigate in the following year, and in a fiercely competitive market like China, "this leaves some room for Chinese automakers to breathe. It is a rare chance," Zeng said.

"This is a contingent event [for the Japanese automaker's market share to fall under 10 percent]," he noted, saying that if the Diaoyu Islands dispute remains unresolved, Japanese carmakers' market share in China is not likely to recover any time soon regardless of the sales promotions they launch.

Misplaced protection

The unrelenting phenomenon of market share declines for domestic brands has caused concern among industry observers in China, who warn that Chinese carmakers will die out in five years if they fail to take the opportunity to innovate.

The lack of research investment and reliance on government protection are two of the major reasons why the Chinese brands are losing ground in their home market, Jia Xingguang, an independent auto analyst based in Beijing, wrote in a commentary on news portal website cntv.cn November 9.

The entire Chinese auto industry's R&D investments in 2009 were only 46.1 billion yuan ($7.4 billion), or 2 percent of its sales, which was half of the international average rate, Jia said.

Meanwhile, Chinese companies are still protected by a mandatory 50-50 joint venture (JV) requirement set for the foreign carmakers operating in the country, Jia noted.

Like in the earlier years in South Korea, protection is needed for such a nascent industry in China, but the JV mandate only protects major State-owned enterprises (SOEs), which enjoy good government relations for attaining car production licenses, Zeng said. Few foreign companies would choose to partner with smaller private Chinese automakers, which have more clear incentives to innovate, he said.

Although SOEs have splashed cash on R&D, they are not efficient, and they mostly rely on the car platforms they get from their foreign partners to make their own cars, Zeng said.

In order to support the country's own automotive industry, the government should also buy more domestic brand cars in their procurements, not just say they will, Zeng suggested.

Chery-GAC alliance

Anhui-based Chery Automobile teamed up with the Guangzhou Automobile Group Co (GAC Group) November 6 to jointly develop engines, transmissions and other components, according to the companies' framework agreements.

The media called the deal a match made in heaven, as both firms are set to benefit from each other.

"Chery is one of the few State-owned automakers that have aggressively developed an extensive model lineup," but it "is deeply in debt and desperately needs cash," Yang Jian, managing editor of Automotive News China, wrote in a commentary November 9.

The GAC Group, flush with cash, "has made the least progress developing its own brand. The company has developed only two models, an SUV and a mid-sized sedan based on the platform of the Alfa Romeo 166," Yang said.

"So Chery and Guangzhou Auto each has something the other badly needs," he said.

The GAC Group's two major partners are Toyota and Honda, and its JVs with the two Japanese automakers are the main sources of revenue supporting its large spending on R&D investments, Zeng said.

With these prospects turning bleak, the SOE naturally has to worry about where its new technologies will be coming from, Zeng said.

Meanwhile, Chery has achieved much in the way of innovation, but has had difficulty implementing new technology into its vehicles, so it hopes to commercialize its technologies through cooperation with the GAC Group, he noted.

Whereas Yang said the alliance might be a one-off case among Chinese automakers, Zeng begs to differ.

Chinese brands face much R&D pressure compared with their foreign competitors. While a foreign JV brand may sell 100,000 units a month of its newly developed model in China, Chinese carmakers can only manage to sell that amount in a year, hence it is more difficult to recoup their investments, Zeng said.

Forming such an alliance will be a good step for the Chinese firms to be able to share their technologies and reduce R&D costs, and European carmakers, such as Peugeot and BMW, have already cooperated in developing technologies, Zeng said.

Shenzhen-based BYD Auto, endorsed by billionaire Warren Buffet, released its own 1.5-liter turbo-charged engine paired with a six-speed transmission in 2011.

"It's going to be a trend for domestic carmakers to team up," Zeng said.

"There's no need for every Chinese manufacturer to come up with its own turbo engine," he noted.