Why Tesla’s Elon Musk needs to be wary of Volvo’s China-fuelled foray into Indian roads

The Economic Times of India, July 30, 2017


Volvo has quietly upped the ante. After a decade of a low-key existence in India, the company will have an assembly plant in Bengaluru ready by end 2017.

Finally, Tesla Motors may have some competition — not just from domestic first-mover in electric vehicles (EVs), Mahindra & Mahindra, but competition of the global variety. Early this month, Volvo Cars made headlines across the world when the 90-year-old Swedish carmaker declared that it will go all electric by 2019, pulling the plug on cars with just an internal combustion engine.

“…Tesla has managed to offer such a car for which people are lining up. In this area, there should also be space for us,” Volvo Cars global CEO Hakan Samuelsson told the media. Some of those present called it a wake-up call for Tesla founder Elon Musk. With a market capitalisation of over $50 billion, Tesla’s stock fell after Volvo’s announcement.

“Volvo’s ambition has been to be a full premium brand competing with Mercedes, BMW and Audi. By leading in electrics, it may find a distinctive positioning among best luxury car brands,” says Detroit-based Michael Dunne, founder of Automotive Resources Asia.

Volvo may have Swedish roots, but its DNA has been showing ample traces of Chinese derivation ever since it was acquired by Geely Holding Group, the parent of Geely Automobile, for $1.8 billion seven years ago. Since then, Volvo Cars has been learning new tricks. The Swedish carmaker that’s earned a reputation of being conservative and safety-obsessed is visibly changing. The bit player — it sold just 5.34 lakh units as against industry sales of 88 million globally in 2016 — is now shifting gears with an eye on future demand.

EVs may well be the game-changing gambit. India is key to that transformation. For multiple reasons. The world’s fifth-largest car market today is expected to climb two notches by 2020. “Europe is not growing. China is our biggest market where we sold 1,00,000 cars in 2016. India is where China was in 2000. Nothing can stop the India market from growing,” says Tom von Bonsdorff, managing director, Volvo Cars India.

Bonsdorff is also excited about India’s EV ambitions. Shunning the internal combustion engine, the Indian government is audaciously betting on EVs to curb pollution and take a leap on transportation technology. By 2030, it wants all new cars sold in the country to electric. “The government’s EV thrust aligns with ours. India is our next growth frontier,” says Bonsdorff.

Tesla seems to be in no hurry to rush into India. In May, Musk had sought clarifications from the government on local sourcing of components on Twitter; the government was quick to point out that foreign direct investment in automobiles is not conditional on sourcing. More recently, Road Transport Minister Nitin Gadkari made a visit to a Tesla factory in the US to sense Tesla’s appetite for manufacturing in India.

Meantime, Volvo has quietly upped the ante. After a decade of a low-key existence, the company will have an assembly plant in Bengaluru ready by end 2017. Operating in the luxury car market, competing with the likes of BMW, Audi and Mercedes with its cheapest entry at a little over Rs 30 lakh, it wants to double its segment share to 10%, selling 5,000 cars by 2020. It will also boost its geographical footprint, growing its dealer network from 19 to 25 by the year end. Some 800 units of the XC90, , priced at a little over Rs 70 lakh, have been sold so far. Volvo’s most expensive model, the hybrid XC90 T8 Excellence priced at roughly Rs 1.27 crore, has received some 50 orders.

Volvo may have Swedish roots, but its DNA has been showing ample traces of Chinese derivation ever since it was acquired by Geely Holding Group.

Dragon at the Door
Volvo’s India moves also gain significance due to the China factor. In 2010, reeling under the aftermath of the global economic crisis, Detroit giant Ford Motors sold the loss-making Volvo Cars to Geely, then known for making cheap, copycat cars. Since, led by Chinese billionaire Li Shufu, it has come a long way.

Geely has been on an acquisition spree – after Volvo it acquired London Taxi Company in 2013, British sports carmaker Lotus and its Malaysian parent PROTON (49% stake) and American flying car firm Terrafugia in 2017. From 4.2 lakh passenger vehicles in 2011, Geely expects to sell 1.1 million in 2017 and is targeting over 2 million unit sales annually by 2020.

Geely’s acquisition of Volvo Cars is now an HBR case study. Volvo’s financial turnaround, Geely’s deft cross-cultural handling, how it leveraged the former’s technology depth, and how it is now boldly stepping into an electric future make the duo fairly unique in global Motown.

“Geely has benefited from Volvo’s engineering experience and R&D capabilities,” says China-based Bill Russo, managing director of Gao Feng Advisory Company. Geely posted its biggest profit growth in eight years in 2016. “With Volvo, Geely immediately got access to a highly respected brand known for safety and reliability,” says London-based Colin McKerracher, head of transport analysis, Bloomberg New Energy Finance. In 2016, Geelyhad a top line of $7.79 billion and profits of $741 million.

It has been a good ride for Volvo Cars too. “Our owners (Geely) have financial strength. And that makes a big difference. Our sales and financials have never been better,” says Bonsdorff. Post acquisition, Geely has invested $11 billion in Volvo to develop new technology and R&D. The strategy seems to be working. Volvo XC90 won the North America SUV of the year award in 2016, beating BMW, Audi, Mercedes and Land Rover. “Volvo has made dramatic improvements under Geely,” says US-based Dunne.

How did Geely manage this feat? When it acquired Volvo, it largely left the latter’s management unchanged and independent with cars being manufactured in Europe. This strategy mirrors well with what Tata MotorsBSE 0.15 % did with JLR after the acquisition in 2008.

Volvo in turn helped Geely gain access to its technology shelf, engineering experience and exposure to global markets. Not that this was always smooth. In 2014, the news of a boardroom cultural clash hit the headlines with Volvo trying to preserve its Scandinavian roots even as billionaire Shufu was pushing for making big, flashy, pricey cars that the Chinese want.
“Today, in the grand scheme of things, we can see Volvo heading down the right path,” says Russo.

With strong foundations, Geely is now fortifying its future and global ambitions. Last month (in June), Volvo launched a separate brand Polestar to focus on high performance electric cars and take on Tesla. Last year in a joint venture with Volvo, Geely launched a new brand Lynk & Co that will focus on making next-gen cars targeted at millennials globally.

Based on a new compact modular architecture platform, in the works at Volvo for some time, it will debut in October. It plans to offer lifetime warranty and a pay-per-use subscription plan to its customers. In India, for now, Geely is looking at the top end of the market with Volvo. For a nation that suffers from poor quality perception in India, Volvo’s luxury positioning may offer the best entry point for Geely.

Click here to read this at Economic Times

Volkswagen in Talks to Make Electric Cars in China

The Wall Street Journal, September 7, 2016


A VW dealership in Louisville, Ky., in August. PHOTO: BLOOMBERG NEWS

German auto maker plans joint venture with state-run China Anhui Jianghuai Automobile

SHANGHAI— Volkswagen AG is exploring a joint venture to make electric cars in China with a state-run company, part of its aggressive push into electric-vehicle production as the auto maker works to resolve its emissions cheating scandal.

The German car maker signed a memorandum of cooperation with China Anhui Jianghuai Automobile Co. for a potential partnership, the companies said in separate statements. Jianghuai said the two will be equal owners of the joint venture, and hope to reach a formal agreement within five months.

“As we aim to be at the forefront of e-mobility, Volkswagen Group is looking forward to explore all options to set up a close and mutually beneficial partnership with JAC,” said Volkswagen CEO Matthias Müller. The company is targeting sales of a million electric vehicles a year world-wide by 2025.

Volkswagen, which derives more than a third of its global vehicle sales from China after three decades of operations there, currently has two car-making partners in the country: SAIC Motor Corp. in Shanghai and FAW Group Corp. in the northeast. Under government rules, foreign car makers must tie up with local partners to produce cars.

China limits foreign auto companies to two local partners to make gasoline-powered vehicles. While the limit doesn’t apply to electric cars, most foreign companies choose to produce alternative-energy vehicles with their existing partners. Officials at SAIC and FAW didn’t respond to requests for comment. Analysts say Volkswagen may be able to strike a more favorable deal with Jianghuai than its current partners.

“You may get a better agreement from a company who values your technology more. SAIC and FAW may already have [electric-vehicle] technologies and do not need VW as much as JAC,” said Bill Russo, a Shanghai-based managing director at consultancy Gao Feng Advisory Co.

General Motors Co. plans to launch about 10 alternative-energy cars with its Chinese partners, SAIC and Wuling, by 2020. Nissan Motor Co. and its partner, Dongfeng Motor Corp., launched an all-electric car in China in 2014.

Wednesday’s disclosure follows Volkswagen’s purchase of a 16.6% stake in U.S.-based heavy truck maker Navistar International Corp. this week. Jianghuai, of Hefei in east China’s Anhui province, is a major truck maker in China. It also builds conventional and electric cars. Earlier this year, Jianghuai signed a 10 billion yuan ($1.5 billion) agreement with NextEV Inc., an electric-car startup backed by Tencent Holdings Ltd. and Sequoia Capital, to develop electric vehicles.

China is going all in on alternative-energy vehicles, as it seeks to cut dependence on oil imports and reduce air pollution. Beijing also regards electric cars as a shortcut for its companies to reach the forefront of an evolving global auto industry.

Chinese governments at all levels last year spent a total of 90 billion yuan ($14 billion) in the sector, including direct cash subsidies for electric-vehicle makers and construction of public charging stations, says UBS Securities.

Sales of electric and hybrid cars and buses quadrupled in 2015 from the previous year to 331,000 vehicles. In the first seven months of this year, sales of such vehicles rose 23% to 207,000 units.

Volkswagen’s current strategy review calls for accelerating development of electric vehicles. Over the next decade, Volkswagen plans to develop around 30 new battery electric-car models, which could account for as much as 25% of the car maker’s total sales.

The company has said it expects to launch the first fully autonomous vehicles by the end of the decade.

The Explosive Growth Opportunity in China’s Automotive Aftermarket

Gao Feng Insights Report, August 2016

We are pleased to share with you our paper titled: The Explosive Growth Opportunity in China’s Automotive Aftermarket.  In this report, we examine one of the major discontinuities shaping the future of the Chinese auto market:  the rapid expansion of the independent aftermarket (IAM).

China’s automotive market is transitioning from a period of rapid growth in new car sales to a slower pattern of expansion going forward.  While this slower pattern of growth is a concern for automakers and suppliers, the market remains at historically high levels of sales, and the car population continues to expand at double digit rates annually.  In addition, the average age of the vehicle population is rising.  Add to this a recent push by the Chinese government to allow sales of original equipment service (OES) parts by independent service providers, coupled with the emergence of digital platforms for accessing services, the conditions are ripe for discontinuous expansion of the independent aftermarket.

All of these factors are contributing to an explosive expansion of the automotive aftermarket services business in China.  In this environment, automakers and suppliers are seeking ways to offer a clear and differentiated value proposition in order to succeed in the aftermarket, and they must act quickly to compete with new entrants who are seeking to disrupt the traditional service model.

We welcome your comments and feedback on our briefing paper 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.

Best Regards,

Bill Russo
Managing Director, Gao Feng Advisory Company

Robert Zhang
Senior Associate, Gao Feng Advisory Company

Emily Wang
Senior Consultant, Gao Feng Advisory Company

Bill Russo to Speak on “Reimagining Mobility in the China Context”

Click here to sign up for the event at Meetup

Date:  March 17, 2016

Location:  naked Hub  3F, 1237 Fuxing Road (corner of South Xiangyang Road), Shanghai (map)

Price:   $25.00 /per person  Refund policy

Alipay/UnionPay:  https://yoopay.cn/event/Mobility

Meet people from other professions/sectors, share new ideas on how to run your business in a more challenging environment that is Shanghai today.  

For this new entrepreneurs’ event, we have invited Bill Russo, Managing Director of Gao Feng Advisory Company, who will talk about China’s Automotive Industry.

The traditional value chain of the automotive industry is being fundamentally transformed by a new wave of “digital disruptors”. Unlike traditional automotive OEMs and suppliers, these digital disruptors are leveraging mobile internet technology to deliver a broader range of services to address mobility needs. Such changes are happening faster in China than in the rest of the world, and China’s Internet giants (Baidu, Alibaba, Tencent) along with mobility disruptors such as LeEco and NextEV are vying to deliver an increasingly connected, electrified, smart and personalized mobility experience.  China has demonstrated strong potential to become a breeding ground for Connected Mobility innovation. Automotive OEM and supplier executives CEOs must learn to reimagine mobility in the China context in order to secure a strong position in this new competitive landscape.

About Speaker:  
Bill Russo is the Shanghai-based Managing Director of Gao Feng Advisory Company and Head of the firm’s Automotive Practice.  He has over 30 years of industry experience including 15+ years as an automotive executive, and had been in China since 2004.  In his corporate career, he has worked for IBM, Chrysler and Harman International.  He is a highly sought-after opinion leader on China’s Automotive Industry, with frequent appearances on Bloomberg and China Central Television.

Fee: RMB 150 online in advance – RMB 180 at the door
Includes dinner, unlimited flow of beer and soft drinks.

Reimagining Mobility in the China Context VFF Microsoft PowerPoint, Today at 1.18.39 PM

For a copy of our new paper on this topic please email bill.russo@gaofengadv.com

Augmentum and Gao Feng Advisory Company Form a Strategic Partnership

Photos Photos, Today at 5.12.50 PM

Bill Russo, Managing Director from Gao Feng Advisory Company
and Dr. Leonard Liu, Chairman & CEO from Augmentum, Inc.

Shanghai, China – February 15, 2016 – Augmentum, Inc., a provider of software services for products and solutions that can digitally transform enterprises, today announced that it has signed a strategic partnership agreement with Gao Feng Advisory Company (“Gao Feng”), a global management consultancy with roots in China.  Both firms will seek to join forces to deliver a unique and comprehensive set of services to their clients in China and worldwide.

The “connect with anyone, anywhere, anytime” world we live in today requires us to re-imagine and transform the journeys that enterprises and their customers take with each other. These transformations have shown us that enterprises need to build, over time, a holistic unified view of their customers, internal teams, and partners.   The delivery of such innovative services to customers is only the tip of the iceberg.  Behind these services there are many more services facing their customers, internal teams and partners to orchestrate the end to end activities necessary to meet the immediate service expectation. Existing islands of systems and information need to be connected in order to effectively respond to the immediate gratification expectations of their customers.

Augmentum & Gao Feng will bring a globally experienced team to collaborate with their clients to co-innovate, architect, design, build and operate digital ecosystems that deliver competitive advantage with a deeply-rooted in-China perspective.   This will encompass providing digital transformation services, digital marketing & ecommerce services, and software development services.

“Throughout the years, we have worked with many large companies as well as startups here in China and worldwide. Our clients together with us have achieved speedy phased incremental transformation within the context of an overall strategy, robust architecture, and product-level quality implementation. We look forward to leveraging our strong partnership with Gao Feng to accelerate the transformation for our clients”, said Dr. Leonard Liu, Chairman & CEO of Augmentum.

“Gao Feng is a pre-eminent strategy and management consulting firm”, said Dr. Edward Tse, founder and CEO of Gao Feng.  “The partnership with Augmentum allows Gao Feng to offer our clients a broad set of capabilities beyond those typically found among strategy consultancies, leveraging deep expertise in the area of digital hardware, software and big data solutions”, he added.

Gao Feng Advisory Company is a pre-eminent strategy and management consulting firm with roots in China and global vision, capabilities, and a broad resources network.

Augmentum started operations in year 2003 and is strategically focused on leveraging the convergence of web, mobile, social media, targeted big data analytics, Internet of Things (IoT) and cloud computing to produce products and solutions.

# END #
About Augmentum

Augmentum was established in the Silicon Valley in 2003 with Global Delivery Centers in Shanghai, Wuhan, and Yangzhou. Our clients include members of the Fortune 500, mid-sized companies and startups in various industry sectors.

We have been fortunate enough to work with many leading edge enterprises to leverage the convergence of web, mobile, social media, targeted big data analytics, Internet of Things (IoT) and cloud computing.

For our clients, we have always delivered product level systems and solutions with high quality, reliable, scalable and extensible.

Connect with us on www.augmentum.com

For Further Queries:
Ping Zhou | Vice President | Email: ping.zhou@augmentum.com


About Gao Feng Advisory Company

Gao Feng Advisory Company is a pre-eminent strategy and management consulting firm with roots in China and global vision, capabilities, and a broad resources network. We help our clients address and solve their toughest business and management issues — issues that arise in midst of fast-changing, complicated and ambiguous operating environment. We put our clients’ interest first and foremost. We are objective and we view our client engagements as long-term relationships rather than one-off projects. We commit to helping our clients to not only “design” the solutions but assist in implementation, often hand-in-hand with the clients. We believe that every member of our team can contribute to problem solving for our clients, from the most senior to the most junior.

Our seniors are former senior consultants at leading management consulting firms and/or senior executives at large corporations. We believe clients would benefit the most from a combination of consultants with substantive experience in consulting coupled with line management professionals.  In addition to our team in the Greater China offices of Beijing, Hong Kong and Shanghai, we have a global network of collaboration partners with a wide range of experience, capabilities and resources.

Connect with us on www.gaofengadv.com

For Further Queries:
Bill Russo | Managing Director – Shanghai, China | Email: bill.russo@gaofengadv.com

Tel: +86 10 5650 0676 (Beijing); +852 2588 3554 (Hong Kong); +86 21 5117 5853 (Shanghai)

Gao Feng website: www.gaofengadv.com

Gao Feng social media:

Dr. Tse’s New Book: China’s Disruptors

Website: www.chinasdisruptors.com

Chinese using carpooling apps to get ride home for holidays

The Associated Press, February 5, 2016

Chinese using carpooling apps to get ride home for holidays Google Chrome, Today at 4.24.12 PM

In this Feb. 2, 2016 photo, real estate agent Chen Xiao, top center in white, poses with passengers from left top, He Shaolei, Han Ajuan, Han’s son Miao Ruijing, Zhang Tao and Li Jin before they start their journey back to their hometown for the upcoming Chinese Lunar New Year, in Shanghai, China. They met on the ride-share app of Didi Chuxing, an Uber-like mobile car-hailing service. Carpooling is still unusual in China, but government officials welcome the idea as a way to alleviate the enormous burden placed on the public transportation system during the Lunar New Year holidays, China’s most important vacation period when hundreds of millions travel to their hometowns. Three others in bottom are another group, from left, Zhang Xiaohui, Yang Chuang and Xu Peng. (AP Photo/Paul Traynor)


SHANGHAI (AP) — The hundreds of millions of Chinese heading home for Lunar New Year have a relatively new travel option this year: mobile apps to find carpool partners to share costs in what is a novel concept for most Chinese.

The apps give an alternative to pricey airfares and hard-to-score train tickets. Software developer Li Jin in Shanghai used one after he had to abort his flight plans because of last-minute work demands, and found that the only train tickets left going to his hometown in northwestern Shaanxi province were for expensive business-class seats.

Then he tried using the Didi Chuxing (pronounced “dee dee choo shing”) carpool app and found a driver, real estate agent Chen Xiao, going his way.

“She said she still had a free space, so we agreed and now I’m using this way to get home,” Li said.

Li paid Chen 400 yuan ($60) for his seat home, roughly the same cost for a second-class train ticket for the same journey. He shared the ride in a BMW sedan with three other passengers, including a child.

The road trip through clogged highways was nearly 23 hours, twice the travel time of an express train, but Li said he appreciated the companionship.

“I think I will do the same for my return trip after the new year, because I get to know new friends, and it’s an experience,” he said.

Carpooling is still unusual in China, but government officials welcome the idea as a way to alleviate the enormous burden placed on the public transportation system during the Lunar New Year holidays, China’s most important vacation period when hundreds of millions travel to their hometowns. All told, Chinese will make a total of 2.9 billion trips this holiday season, and 2.5 billion of them will be by road, according to official estimates.

“We encourage car-pooling services that are not intended to make profits,” transportation official Wang Shuiping was quoted as saying by state media outlets. “We also remind that parties to the services must be clear on each side’s rights and obligations to avoid disputes.”

Leading the nascent inter-city carpooling market is Didi Chuxing, an Uber-like mobile car-hailing service that has been most commonly used for hailing city rides, but the company began to offer carpooling services for city commuters over the past year and, by the end of September, introduced car-sharing services for inter-city trips among 343 Chinese cities.

Users can pick the departure city and destination city and enter the desired date of travel to find private drivers with the same itinerary and an empty seat.

“We launched this matchmaking function to help us make this inter-city car sharing service another means of transportation alongside planes, trains and other forms of public transport,” Didi Chuxing spokesman Wang Mingze said.

Wang said 300,000 used the service in the first of week of the holiday travel, which began Jan. 24. As the Feb. 8 start of the holiday drew closer, the usage jumped to 100,000 per day, and nearly half of the orders involved trips longer than 500 kilometers (310 miles), he said.

Wang estimated that the platform would serve more than 1 million people by the end of the 40-day travel period.

Another player in the market is 58 Ganji Group, China’s largest online classified ad service, where users have been for years posting carpooling information and which also now has a mobile app. Huang Wei, a vice president, said the site expects to have more than 1 million posts for carpooling this holiday season, up from last year’s 700,000 posts, although the company does not track the completion rates.

“China does not have a carpooling culture yet, but you see a spike during the holiday season, when the demand goes up because people cannot secure train tickets and seek alternatives,” Huang said.

He said the routes posted in online classified ads conform to the migration patterns in China, where migrant workers flow from inner provinces to the more prosperous coastal provinces for work.

Didi Chuxing says it has purchased insurance for its users.

Bill Russo, an auto industry analyst at Gao Feng Advisory Company in Shanghai, said the app is another example how the technology is empowering the public. “It’s growing even more popular as an alternative to individual car ownership or public transportation.”

Premium carmakers see China drama ahead

The Financial Times, August 30, 2015

Click here to read this article at FT.com

by Andy Sharman, Motor Industry Correspondent

China’s stock market crash this week brought a jolting end to an uncomfortable summer for most of the world’s carmakers, who in past years had enjoyed a smooth ride in the industry’s most profitable market.

For the luxury marques, though, the pain had begun a while back.

A crackdown on ostentatious consumption had threatened to depress sales for the likes of Bentley and Rolls-Royce, ever since Chinese president Xi Jinping launched his anti-corruption campaign in 2013.

This year, the impact has started to show. “Everyone’s really hurting,” says one executive at a luxury carmaker.

A combination of a slowing economy, restrictions on registration plates in larger cities to ease congestion, and increasing consumer appetite for domestic brands — all against the backdrop of the anti-corruption drive — have created a difficult environment for western manufacturers.

“All of these factors have a more direct correlation to sales than a volatile stock market,” says Bill Russo, a Shanghai-based consultant.

Even so, the sudden deceleration in Chinese car sales came as a surprise to some — not least when sales went into reverse in recent months. In July, car sales fell for a second consecutive month, by 6.6 per cent, according to the China Association of Automobile Manufacturers.

Some analysts believe that the scale of the decline is such that multinational manufacturers such as Volkswagen and BMW — respectively the parent companies of Bentley and Rolls-Royce — will be forced to warn on profits in the coming weeks.

“Please keep in mind that we still have some drama ahead of us,” says Max Warburton, an analyst at Bernstein Research.

It amounts to a startling turn in fortunes for the car industry.

But registrations of luxury and ultra-luxury vehicles were down almost 10 per cent year-on-year in the first six months of 2015, based on figures from Bernstein Research.

devaluation of the Chinese currency has not helped, making already expensive European cars even more so.

This has taken a heavy toll on exports of British-made models. Bentley, which counts China as its second-biggest market, reported worldwide first-half sales down almost 12 per cent to 4,600 units. It was a similar story at Rolls-Royce, for which global deliveries fell 10 per cent to about 2,000 cars in the first half. Neither manufacturer breaks out six-month sales by country, but domestic peer Jaguar Land Rover offered a window to the state of the world’s largest car market: sales in China were down 27 per cent in the first half.

Not all luxury car brands have suffered such declines. Porsche, maker of the Cayenne sport utility vehicle, reported sales up 48 per cent in the first half of the year.

But volumes to not tell the full story. China’s economic headwinds have already created what analysts describe as a “hyper-competitive” market. Porsche has admitted that dealers, independent of the company, have been cutting the price of its Panamera sports car by as much as 20 per cent. Chinese pricing website Bitauto also carries examples of Bentley Flying Spurs and Rolls-Royce Wraiths discounted by a similar percentage.

To put that in context, in the past, western luxury cars typically sold at a premium to their list prices in China.

For some companies, this turnround is already having an effect. China accounts for more than 60 per cent of JLR’s earnings before interest, tax, depreciation and amortisation, according to Bernstein — and the country’s slowdown has caused net income to almost halve at parent company Tata Motors. Similarly, Bentley’s operating profit fell from €95m to €54m in the first half.

Both companies, however — having ridden the tide of rising wealth in China for several years — are outwardly calm.

“Don’t worry,” said Wolfgang Dürheimer, Bentley chief executive, speaking to the FT last month. “Of course we need to take the slowdown of the market seriously but . . . I strongly believe in the Chinese market. There are some changes going on at present, but on the long-term view it will be a very profitable basis for us.”

Industry executives point to low car density — less than one in 10 people drive in China — and a still growing middle class as growth opportunities. Bentley and Rolls-Royce, for example, plan to launch SUVs — increasingly the vehicle of choice in China — over the next two years.

Amid the turmoil this week came another cause for optimism. Alongside the interest-rate cut announced on Tuesday by the China’s central bank was a targeted intervention in the car industry: the country reduced by 300 basis points the reserve ratio required to be held by auto financing and leasing companies, potentially increasing the funds available to car buyers in the country.

It seemed to suggest that China was committed to supporting car sales. But with two-thirds of premium auto purchases still made in cash, the impact may initially prove limited.










谢祖墀 (Edward Tse)

罗威 (Bill Russo)

林志强 (Chee-Kiang Lim)

座机: +8610 8557 0676 (北京); +852 2588 3554 (香港); +8621 5117 5853 (上海)

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.


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.


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