The Road Ahead A Look at China’s Automotive Coatings Market

October 10, 2012

Repair and OEM coatings markets are fundamentally very different, as one shadows automotive production and the other follows more closely with customer preferences. Luke Johnson, senior analyst at GCiS China Strategic Research, discusses some of the findings from their recent market study on automotive coatings.

What were some of the general findings of the report?

Luke Johnson, senior analyst at GCiS China Strategic Research: Although the report was released in July 2012, the base year of the study is 2011. The market study is broken into two main segments: OEM coatings and repair coatings. Altogether, the market is worth about RMB18 billion (USD2.9 billion), not including exports, and more importantly, output is about 463,000 tons. The OEM market is significantly bigger at about 313,000 tons, whereas the repair coatings market is about 150,000 tons, growing at about 16 percent and 17.3 percent respectively.

Besides passenger cars, busses, trucks and engineering equipment are also significant users of the OEM and repair coatings. For OEMs at least, buses and trucks account for about 75,000 tons of the total OEM coating figure.

One of the most interesting points is the complications of addressing the repair coatings market. Basically, repair coatings are difficult to define in China. A company, really only domestic, might sell the same paint to repair shops as they do to low speed electric vehicle, or even bus and truck, OEMs. This makes a total market size difficult to define, especially when you compare numbers offered by domestic companies with those of foreign companies.

Can you give us a breakdown of the different players in the Chinese automobile coatings market and the role of foreign and domestic producers?

Johnson: For the Chinese automobile coatings market, foreign firms represent about 70 percent of revenues, and a little less by total output. Specifically, for OEM coatings, the figure is about 83 percent by revenues and 78 percent by output, and for repair coatings, in which we include the low-end market, foreign companies account for only about one-third of the total output. For repair coatings, foreign firms really only sell high-end products; they sold between 50,000 and 60,000 tons of repair coatings in the China market last year.

Based on your forecasts, what is the direction of growth for automobile coatings in China?

Johnson: Well, OEM coatings tend to follow very closely with car sales, and recently, there was a major drop in car sales in China. Between 2009 and 2010, the industry was booming, and passenger cars grew over 30 percent in 2009, about 25 percent in 2010, and sales in busses and trucks were also robust. But in 2011, automobile sales plummeted, and OEM coatings were affected by this.

OEM coatings sales do not reflect car sales perfectly, however. There are adjustments in the industry, like improved application techniques of newer production lines in China, which will slightly decrease the average amount of coating used on a single vehicle. Cars are getting larger in China with more and more SUVs on the road, so that can somewhat counteract this trend as well.

What are some inhibitors, which caused some of the lower sales growth of automobiles in 2011?

Johnson: For automobile sales, you can partly attribute this drop to a number of government policies that were discontinued in 2010. Some of those included subsidies for purchases in rural areas, subsidies with engines smaller than 1.6 liters, old car replacement policies changed, purchasing restrictions in major cities—Beijing for instance—certainly felt this effect.

Do you see this as a long-term trend in the Chinese market or do you see a rebound in the near term?

Johnson: We believe the Chinese automobile market will bounce back but it will not return to the 30 or 40 percent figures we saw in 2009 and 2010. Rather, it will continue to grow, but at a more modest pace. Currently, we are expecting growth of somewhere around eight to nine percent in 2012.

Would you say that the Chinese automobile market is a “mature” market?

Johnson: As far as the market saturation, it is very far from that point. If you look at mature automotive markets such as the U.S. or Japan, the figures are very different. In the U.S., there are about 800 vehicles per 1,000 people; in Japan, the ratio is about 600 to 1,000. While in China, the absolute number of people is much higher and the number of cars is much lower. Consequently, there are only about 60 vehicles per 1,000 people in China, so we can see that the market has a long way to grow before it is “mature.” So if you could imagine when China reaches 300 cars per 1,000 people—that’s relatively modest—that would mean about 400 million cars on the road. Now, roughly translating, if drivers buy a car about every 10 years or so—there are 10-year scrapping policies as a basis for this assumption—that’s about 40 million vehicles sold every year.

In 2011, there was about 18 million sold. Therefore, we wouldn’t say it’s saturated—although we see clogging effects in big cities—but as far as the country as a whole, there is good reason why so many people are optimistic about the automobile market and automobile coatings in China. For the automobile coatings market, this translates to a healthy demand for OEM coatings.

What are some other developments in the market besides automotives themselves that you see driving the auto coatings market in China?

Johnson: The insurance industry will be a major driver for repair coatings. As the insurance market becomes more mature, more cars will be legally covered, claims will be filed more regularly that will cause the demand for repair coatings to increase. The insurance market has made good progress in coverage and credibility over the past decade. As drivers get insurance coverage and more expensive cars, they are more likely to take their vehicle to be repaired and to maintain their original value.

Are we seeing faster growth in repair coatings relative to OEM coatings?

Johnson: Yes. Repair coatings and OEM coatings are fundamentally different in terms of where they’re used, how they’re used, and so are drivers affecting their growth. For repair coatings, both the number of cars on the road, the value of the average car and the average distance driven are all increasing. This is at least in part related to improvements in China’s roadway infrastructure. All of this translates into growth in the repair coatings market, especially for higher-end foreign coatings. These coatings are used to repair some of the newer, higher value cars such as Mercedes and BMWs being sold in China. The overall value of cars on the road is increasing, and therefore the importance of 4S and Tier 1 repair shops, are also increasing.

But again, another issue that is affecting the total sales growth of repair coatings is the low-end market and its wider range of applications. The advantage is that repair coatings can simply be sprayed-on and do not require heating like most OEM coatings do. On a unit cost basis, repair coatings are typically more expensive than OEM coatings, because unlike OEM coatings, repair coatings don’t require heating.

Additionally, as far as repair coatings go, many Chinese drivers actually refinish their entire vehicle to maintain the value. That is another significant driver of repair coatings and something that is somewhat unique about the Chinese market. Therefore, we expect to see a bump in refinish coatings around 2014 or 2015, or about four to five years after the 2009-10 boom in car sales.

Are there coating applications outside of the automobile market that were significant for sales in China?

Johnson: OEM paint manufacturers are essentially trying to make their products more attractive to end-users. So what do end-users want? End-users are car manufacturers and they want to cut costs. This creates several efficiency and demand trends in the industry that will also affect the sales of OEM coatings. For example, competition is too high for OEMs to pass-on excess costs to customers, and consequently, they put pressure on their upstream suppliers to offer a cheaper product. Therefore, some coatings suppliers may have introduced products that reduce costs by combining functions between coating layers, or offering a paint that can be applied in thinner coats.
Because repair coatings are the fastest growing segment of the market, do you see foreign suppliers moving into repair coatings?

Johnson: Well, there are many foreign players that are already selling repair coatings. PPG, AkzoNobel, DuPont, Nippon, KCC, Sherwin Williams, BASF and some others are already in the market. This makes entry for a new foreign player difficult because they would need to compete against these huge multinationals at the high-end of the market. It wouldn’t make sense for a foreign player to try to compete at the low-end of the market, as a foreign supplier simply cannot, or more likely does not want to compete on price. Therefore, they need to find a buyer who is willing to pay a premium.

Let me ask you the opposite question. Do you see any Chinese coatings producers moving into the market for high-end coatings?

Johnson: Yes, there are a few Chinese producers that offer high-end coatings. Daoqum and Guangzhou Strong Chemical are examples of local firms that offer high-end products, although their market share isn’t especially high; each holds around five percent or so.

Who are the key OEMs in this market?

Johnson: The largest car manufacturers, or OEMs include Hyundai, Dongfang, FAW, Changgang, Great Wall, Honda, VW, GM, Toyota, Nissan, BMW, and the other multinational car manufacturers. There are a lot of different automobile brands produced in China.

Why study the Chinese automobile coatings market?

Johnson: Generally, we are very selective in the subject that we choose to study in a Limited Production Study, or LPS report. There is a long list of requirements that a product or market must meet before we can go ahead with the study. Some of those requirements include market size, composition, and concentration. We do not do market studies on markets that are heavily concentrated around domestic players, for instance. Also, the market must segment well. A study on instrumentation would be difficult because of the wide range of product segments.

Another important issue is market concentration. Put simply, we won’t do a market study in a market that has 1,000 players and none of which has a market share of over one percent; getting a representative sample would require far too many interviews.

Specifically, in this report, we interviewed about 40 different players, which represent about 80 to 90 percent of the entire market, which is a very good concentration. For this study, we spoke to a total of 84 players, including suppliers, channel players, end-users and repair shops as well as industry experts with individuals in academia, industry associations and regulatory organizations.

GCiS is a US- and Chinese-owned research-based consulting firm. Opened in 1997, GCiS advises multinational clients in business-to-business industries on their China strategy. GCiS regularly publishes custom and off-the-shelf reports on markets in the energy, industrial, chemicals and materials, and construction sectors. For more information, please write to inquiries@gcis.com.cn.

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