Competing in the China Truck Market

Gao Feng Insights Report, February 2015

We are pleased to share with you a report titled: Competing in the China Truck Market.

While global brands have enjoyed success in China’s passenger vehicle market, the same cannot be said for the commercial vehicle market. This segment has been dominated by local Chinese manufacturers who have relied on sales to local buyers seeking low-priced equipment. However, we anticipate that several factors will be reshaping the market and competitive landscape in the commercial truck sector, creating a “window of opportunity” in China for participation in what has historically been a predominantly local market.

We believe that market conditions and regulatory challenges will create a need within China’s truck industry to form alliances with foreign partners to secure capabilities which are lacking in the commercial vehicle sector in China. China’s truck manufacturers will need to upgrade their technology to meet demanding new regulations, and will need to improve their service and distribution business practices as the market matures. The changing mix of products towards a higher concentration of line-haul HT, along with anticipated policy changes brought about from China’s intention to reform its State-Owned Enterprises, are driving forces which will alter the landscape of competition in the commercial truck sector.

We welcome your comments and feedback on our report or in general about our firm.  We would be glad to meet you in person to share our data and perspectives in a fuller manner.  Please let us know if you are interested in meeting and discussing directly how we can help you to operationalize these insights.

Thought leadership is core to what Gao Feng does.  We will, from time to time, share with you our latest thinking on business and management, especially as it relates to China and China’s role in the world.

In this paper, we offer our “deeply rooted in China” perspective to the analysis of the impact of each of these developments.

Best Regards,

Dr. Edward Tse
CEO, Gao Feng Advisory Company
edward.tse@gaofengadv.com

Bill Russo
Managing Director, Gao Feng Advisory Company
bill.russo@gaofengadv.com

Tel: +86 10 8557 0676 (Beijing); +852 2588 3554 (Hong Kong); +86 21 5117 5853 (Shanghai)

Gao Feng website: www.gaofengadv.com

China’s Car Factory Binge Risks Hurting Automakers’ Margins

Bloomberg Business, February 13, 2015

Automakers have been successful at adding factories. Maybe too successful

When consultant Bill Russo visited Chery Automobile’s headquarters in China’s eastern Anhui province about three years ago, he listened to the company’s plans to expand its factories to make as many as 1 million vehicles a year. But demand didn’t grow as planned. So Chery today has the capacity to make 900,000 vehicles annually—twice the number of cars it sold last year. Sales have slumped by one-third since their peak in 2010.

“Chery is a classic case” of overcapacity, says Russo, a former Chrysler executive who’s now a Shanghai-based managing director at consultant Gao Feng Advisory. “The pressure is that once they receive the permission [from government authorities] to build, they feel like they have to build.” Chery didn’t respond to requests for comment about its sales falling short of planned capacity.

Domestic and foreign-based carmakers are building more factories in China than anywhere else, a construction binge that risks hurting margins in what remains one of the world’s most profitable vehicle markets. By 2017 there will be 140 car production plants in China, vs. 123 at the end of 2014, estimates JSC Automotive Consulting.

According to IHS Automotive forecasts, factories across the mainland in 2015 will be able to build 10.8 million more vehicles than will be sold in Greater China. In North America, however, IHS expects plants to churn out about 3.2 million more cars this year than the factories were intended to produce when they were built.

Overcapacity is only expected to get worse for Chinese carmakers. China will have about 11.4 million vehicles’ worth of idle capacity by 2017, more than double that of European automakers, according to data from JSC and Deloitte Consulting.

Some carmakers already are regretting plans for Chinese plants that will open in the next few years, says Jochen Siebert, Shanghai-based managing director of JSC, who declines to name the companies. “But that decision has been made,” he says. “It’s done; they cannot backtrack.”

Plans for most of the factory space built in China in the past few years were put in motion during the global recession, when China proved to be a godsend while General Motors and Chrysler were being bailed out by the U.S. taxpayer and Europe’s auto sales seemed in free fall. The trouble is, too many carmakers sought the same refuge.

“When you get too many competitors with too much capacity, there’s just not enough growth to sustain everybody,” says Thomas Callarman, Shanghai-based director of the China Europe International Business School’s Centre for Automotive Research. “They’re all smart people, and they look at the right things, but I think they read the tea leaves wrong.”

For now, the China car market remains profitable. Chinese automakers accounted for 7 of the 10 carmakers with the highest profit margins in the world, with BMW’s Chinese partner, Brilliance China Automotive Holdings, topping the ranks at 8.2 percent in the past year, according to data compiled by Bloomberg Intelligence. Toyota Motor’s margin was 7.6 percent. Hyundai Motor and Volkswagen’s Audi count China as their largest market, with Subaru maker Fuji Heavy Industries standing out as the only car manufacturer among the 10 most profitable that doesn’t have a factory in China.

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Foreign carmakers have been among the most enthusiastic factory builders in China, with Hyundai, Renault, and Fiat Chrysler Automobiles’ Jeep among those that have announced plans or are already building in China.

GM will soon sell Buicks made at a plant that opened last month, with plans to open a Cadillac factory later this year. GM has 22 factories on the mainland. Volkswagen, which is vying with Toyota and GM for the global auto sales crown, has 28 plants in China and will open three more within the next few years.

Jochem Heizmann, who heads Volkswagen’s China business, told reporters in November that the automaker has decided to expand its China capacity to more than the previously targeted 4 million autos a year by 2018 because it couldn’t build enough to keep up with demand.

In the next few years, however, increased competition amid slowing growth in car sales will result in lower prices, says Yang Yipeng, a Beijing-based analyst at Goldman Sachs’s Chinese affiliate. As the world’s second-largest economy cools, vehicle sales are forecast to expand this year at just half of 2013’s 8 percent growth, to 21.3 million passenger vehicles. General Motors President Dan Ammann said in January that he expects China’s sales expansion to slow over the next few years after being the main engine for the global industry’s growth for 15 years. Volkswagen in November also said the pace of expansion is becoming “more normal” in China.

The spare capacity may force carmakers to increase sales incentives, hurting profit margins, Barclays says. “This is a heavy asset industry,” says Song Yang, an analyst at Barclays. “When utilization trends down, margins will trend down.” Already, car dealerships in China are asking for financial support and lower sales targets from carmakers after a combination of rapid expansion of sales networks and increased restrictions on vehicle ownership by city governments hurt their profits. BMW agreed last month to pay 5.1 billion yuan ($815 million) to its dealers. Toyota will give $200 million to the dealers of one of its joint-venture partners, FAW Group, while Renault, which is building a plant that opens in China next year, said it will give its distributors more rebates.

The bottom line: By 2017, plants in China will be able to produce 11.4 million more cars than will be sold there, JSC Automotive forecasts.

 

Click here to read this article at www.bloomberg.com

The Evolution of Automotive Suppliers

Gao Feng Insights Paper, February 2015

Industry observers tend to overlook the changing role and structure of the automotive supply base. Of course, the story of success in the market is often viewed through the retail sales volume of branded OEM products. However, over the course of several decades, automakers have grown increasingly reliant on an ever smaller number of large tier 1 suppliers to deliver the core technology and innovation needed in the marketplace.

As a result, automakers face new challenges to maintain a balance of power with this new breed of supplier. In addition, suppliers at all tier levels must establish a position of relevance in a supply chain dominated by such power players. And finally, tier 1 suppliers must continue to anticipate the trends and development in the marketplace and upgrade their portfolio of capabilities in order to press their advantage.

In this analysis, we describe the trends, highlight several case examples, and discuss the implications of these developments along four strategic themes.

Thought leadership is core to what Gao Feng does.  We will, from time to time, share with you our latest thinking on business and management, especially as it relates to China and China’s role in the world.

Bill Russo
Managing Director, Gao Feng Advisory Company
bill.russo@gaofengadv.com

Chee-Kiang Lim
Principal, Gao Feng Advisory Company
ck.lim@gaofengadv.com

Tel: +86 10 8557 0676 (Beijing); +852 2588 3554 (Hong Kong); +86 21 5117 5853 (Shanghai)

Gao Feng website: www.gaofengadv.com

Bill Russo to Brief Investors on New Energy Vehicles Market in China

TOPIC:

The Path to Electrification of China’s Automotive Industry

Date: Thursday, February 12, 2015

Time:  10AM EST, 11PM China

Venue:  Conference Call

Click here to register (sponsored by Coleman Research Group)

  • Recent performance of electric vehicles manufacturers in China
  • Tesla’s growth plans and the impact on dealership dynamics
  • Traditional auto ownership model re-shaped by rapid urbanization
  • Disruption of the automotive value chain
  • New mobility concepts changing traditional business models
  • Unique context of China’s urban transportation challenges
  • China’s 12th 5-year plan identified seven strategic emerging industries including electric vehicles, energy efficiency & environmental protection, new generation information technology, bio-technology, high-end equipment manufacturing, alternative energy and new materials
  • Need for OEMs to develop strong relationships with telcos and technology players
  • Companies: Ford (F), General Motors (GM), Volkswagen (VOW), Toyota(TM), Honda (HMC), Fiat Chrysler (FCAU), Nissan (NSANY), Hyundai (HYMTF), Daimler AG (DDAIF), BMW AG (BMW), Continental AG (CON), Valeo (EPA), TRW Automotive (TRW), Mobileye (MBLY), Uber, Yidao, Relay Rides, Baidu (BIDU), Alibaba (BABA) and Google (GOOG)

As the balance of world market and economic power shifts from West to East, China has emerged as the key location in the battle for dominance of the 21st century’s global auto industry. Due to increasing pressure from air pollution, oil consumption and urban congestion, the focus of the country’s auto industry will increasingly switch from internal combustion engine vehicles to alternative propulsion technologies, particularly those powered by electricity. Already many observers believe that the government’s ambitious series of programs and policies designed to accelerate the development of new energy vehicles run over the last decade will lead to the emergence of China as the key location for a global “green” mobility revolution. As this happens, the eventual electrification of the automotive powertrain will transform the automotive industry.
ABOUT OUR EXPERT:

Bill Russo is Managing Director at Gao Feng Advisory Company, Ltd. He has more than 25 years of experience in the industry. He was previously VP of Chrysler Northeast Asia, where he successfully negotiated and secured government approval for six vehicle programs with three different Asian partners. In this time period, he launched a regional holding company as well as two distribution companies and oversaw the industrialization of the first Chrysler and Dodge-branded vehicles in Asia. He holds a U.S. patent for his innovative efforts towards reducing automotive new product development cycle time and is a published author and opinion leader whose viewpoints have appeared throughout several media outlets.

Qoros Names Former Head of GM China Operations as CEO

The Wall Street Journal, February 3, 2015

Chinese Startup Car Maker Appoints Former GM Exec in Bid to Revive Fortunes
By Colum Murphy

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Phil Murtaugh in Los Angeles on March 16, 2012. PHOTO: REUTERS

SHANGHAI—Chinese startup car maker Qoros Automotive Co. appointed the former head of General Motors Co.’s China operations as its new chief executive in a bid to revive its fortunes in the world’s largest car market.

Phil Murtaugh ’s appointment is effective immediately, a statement on the company’s website dated Monday said. He succeeds Guo Qian, who resigned in December as chairman and chief executive to return to Qoros partner Chery Automobile Co., according to a Qoros spokesman. Mr. Guo couldn’t be reached for comment, and a Chery spokesman said he had no immediate comment.

Qoros produces cars in China and is a 50-50 joint venture between China-based Chery and Israeli investment firm Israel Corp. It had hoped to woo customers in China with a mix of quality and affordability. But the brand sold just under 7,000 cars in China last year, the company’s first full year of sales, according to data from consultancy Automotive Foresight.

In October, Mr. Guo told The Wall Street Journal that awareness of the new Chinese auto brand in China was falling below company expectations. Anning Chen, a Chery executive, has succeeded Mr. Guo as chairman.

Stefano Villanti, head of sales, marketing and product strategy, has also recently left the company. He told The Wall Street Journal last October the startup period for the company had been “tougher than expected.” Mr. Villanti couldn’t be reached for comment Tuesday.

In November, Israel Corp.’s controlling shareholder, billionaire Idan Ofer, reaffirmed his support for Qoros. This followed reports in Chinese media that the firm was considering pulling out of the venture.

Mr. Murtaugh is credited in the automotive industry with being a pioneer of GM ’s earlier successes in China and has spent almost 16 years in the country. Most recently, Mr. Murtaugh headed the now-defunct Chinese-invested electric-car manufacturer Coda Automotive Inc.

Bill Russo, managing director of consulting firm Gao Feng Advisory, who worked briefly with Mr. Murtaugh at Chrysler in China, said Mr. Murtaugh’s challenge will be to create a car that appeals to buyers, whether they are in China or elsewhere.

“The question is whether the world is waiting for a high-end Chinese car? So far the market is saying ’no,’” Mr. Russo said.

Write to Colum Murphy at colum.murphy@wsj.com