China’s thriving SUV-only automaker looks to global growth

ASSOCIATED PRESS  / Feb 22, 2017, 03:06 AM

By JOE McDONALD AP Business Writer

In this photo, taken, Feb. 19, 2017, a worker assembles a Haval SUV H3 model at the Great Wall Motors assembly plant in Baoding in north China’s Hebei province. Great Wall Motors became China’s most profitable automaker by making almost nothing but low-priced SUVs. Now it wants to expand into global markets. (Photo by ANDY WONG/AP)

BAODING, China (AP) — Wei Jianjun is the chief matchmaker in China’s love affair with the SUV.

A decade ago, the chairman of Great Wall Motors Ltd. saw opportunity as the bulky vehicles began shedding their image in China as a farm tool. Wei cut back on making sedans and poured resources into its fledgling line of Havals.

That gamble paid off as SUVs caught on with drivers who saw them as the safest ride on bumpy, chaotic streets. By 2013, with demand surging, Great Wall had become China’s most profitable automaker and Wei was a billionaire.

Now, Wei wants to make the Haval a global brand. It’s an ambitious goal that requires advances in safety and features for a company known until now mainly for low prices. Great Wall sells Havals in Australia, Italy and Russia, but exports were less than 5 percent of last year’s output of just under 1.1 million units.

“By 2020, we hope Haval can become the world’s biggest specialty SUV brand,” Wei said at a reception at Great Wall headquarters in this city southwest of Beijing to celebrate sales passing the 1 million mark.

That “globalization strategy” includes working toward meeting American safety standards, Wei said. But he gave no indication when Haval might export to the United States or major European markets such as Germany.

Great Wall is part of a cadre of small but ambitious independent Chinese automakers that grew in the shadow of state-owned giants such as Shanghai Automotive Industries Corp., which assembles vehicles for General Motors Co. and Volkswagen AG.

Without foreign joint-venture partners, the independents created their own brands and started exporting to Africa and Latin America.

Geely Holding Ltd., which owns Sweden’s Volvo Cars, plans to start U.S. and European sales of its new Lynk & Co. brand in 2019. BYD Auto, the world’s biggest-selling electric car maker, supplies battery-powered buses and taxis in the United States and Europe. Great Wall opened a European assembly plant in Bulgaria in 2012. It has similar facilities with local partners in Russia, Indonesia, Iran, Egypt and Ecuador.

SUVs have an outsized role in China, where their popularity has helped offset sagging demand for sedans and other vehicles.

Sales of domestic brand SUVs soared 58 percent last year to 5.3 million units out of total sales of 24.4 million in the world’s biggest auto market. They are growing fastest in the lowest price ranges, dominated by Haval and Chinese rivals. That has helped Chinese brands to claw back market share they were losing to global competitors.

The top seller was Haval’s flagship H6, starting at 89,000 yuan ($12,900), which has become China’s most popular vehicle to date. H6 sales surged 55 percent last year to 580,000 units while the overall market grew 15 percent.

“They are definitely one of the most successful car companies in China,” said Yale Zhang, managing director of Automotive Foresight, a research firm.

“This company has some very special strengths,” Zhang said. “Of course, it also has weaknesses, because their products are focused on one model. But they are correcting that. They have tried very hard to cultivate another star product.”

Great Wall’s 2016 profit rose 31 percent to 10.5 billion yuan ($1.5 billion) on revenue of 98.6 billion yuan ($14.4 billion). Wei, 52, ranked No. 36 on the year’s Hurun List of China’s richest entrepreneurs, with a fortune estimated at $5.9 billion.

Begun in the 1980s as a collective that repaired and modified vehicles, Great Wall was bleeding cash when Wei, then 26, left his father’s business making industrial machinery and signed a deal in 1990 to take it over and share profits with the collective’s members.

The company launched a sedan in 1993. Its popular Deer brand pickup trucks were its first hit, in the late ’90s.

Its CEO, Wang Fengying, is a former saleswoman who worked her way up the ranks, becoming the first woman to lead an automaker a decade before GM Chairman and CEO Mary Barra.

Wei has a reputation for military-style discipline.

“He wants a quick decision and a thorough execution,” Zhang said. “This style is very different from large automotive companies, which can be a huge bureaucracy. This company definitely doesn’t have that weakness.”

Most of Great Wall’s 60,000 employees work at its Baoding factory complex, a 13-square-kilometer (5-square-mile) mini-city of assembly lines and workshops in long, pale yellow two- and three-story buildings.

A test track that wraps around the complex is banked to allow drivers to push vehicles to over 200 kph (125 mph).

“It’s an orderly, organized, very disciplined operation,” said Bill Russo, managing director of research firm Gao Feng Advisory. “You think, this isn’t China; this is what I would expect to see in Switzerland or Germany.”

Wei has emphasized product quality, in one case hiring Korean auto industry veterans to show Great Wall how to make better body panels, according to Russo, a former Chrysler executive. That has paid off by raising Haval’s image from entry-level to a mass-market brand that can charge higher prices.

“They have cracked that glass ceiling,” said Russo. “Their quality level is better than the basic Chinese car companies.”

Still, Great Wall’s market is increasingly crowded as Chinese rivals roll out dozens of new SUVs. Global brands including VW and GM are preparing to invade Haval’s segment with their own low-cost models.

Competitive pressures have reached a “deep red level,” Wei said.

The company is responding by trying to move up-market.

Haval opened a Shanghai design studio in 2013 and a Technology Center in Baoding, housed in a sleek glass tower with reflecting pools and a 23-story lobby. It includes engineering workshops, a wind tunnel and a low-pressure chamber that can mimic operating conditions up to 5,000 meters (16,500 feet) in altitude.

In November, Great Wall unveiled a premium brand, Wey, an alternate spelling of Wei’s name. It has yet to say how it will attract buyers to models expected to be priced above 200,000 yuan ($29,000).

Haval has struggled to lure drivers to its higher-priced models, such as its top-of-the-line H9, a seven-seater starting at 210,000 yuan ($30,600), that sold just 11,500 units last year. The H8, another full-size model, sold only 7,500 units.

In November, the company rolled out an updated H6, designed by a 50-member team led by Pierre Leclercq, a Belgian-born BMW veteran.

“The H6 is an extremely important product for us,” said Leclercq, the company’s senior vice president for design.

The company’s next rising star is the H2, a four-seat compact SUV that sold 197,000 units last year. But it starts at 87,000 yuan ($12,700), a step down in price instead of toward a higher market segment.

Great Wall also faces pressure from Chinese government rules that require improved fuel efficiency by 2020. That will hurt brands such as Haval that lack smaller models to improve the average of their product lineup.

In response, Great Wall has developed an electric car, the C30 EV, a compact sedan it says can go 200 kilometers (120 miles) on one charge. The company has yet to say when it might go on sale.

Automakers Expanding in China May Soon Face Weakening Demand

The New York Times, March 28, 2016

by Keith Bradsher

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A Cadillac exhibited under water with goldfish in Guangzhou, China. Automakers have pinned their hopes on China, but its economy is cooling. CreditZhong Zhi/Getty Images 

 

SHANGHAI — The new $1.3 billion Cadillac factory on the outskirts of Shanghai is a shrine to modern manufacturing, the kind of facility that automakers all over the world dream of building but can seldom afford.

Hundreds of robots bend, arch and twist to assemble the body of Cadillac’s new flagship CT6. Lasers seal the car’s lightweight aluminum exterior using techniques that the carmaker, General Motors, has only just introduced in the United States. Yardlong, bright yellow robots like mechanical Alaskan huskies tow five-foot-tall carts of auto parts to the assembly line.

“It’s more along the lines of aircraft technology than traditional, spot-welded steel bodies,” said Paul Buetow, G.M.’s head of manufacturing in China, as he strode along the assembly line.

The factory is part of an aggressive expansion by automakers in China, the world’s largest market for new cars and the industry’s brightest hope for the last 15 years. But the country’s economy is now cooling, which could leave carmakers with too many factories and not enough buyers.

G.M. will open a second, $1 billion factory in Wuhan next year. G.M.’s main rival in the Chinese market, Volkswagen, plans to open large assembly plants next year alongside its existing factories in the cities of Foshan, Ningbo and Yizheng and build one in Qingdao by 2018. Hyundai plans to complete a factory south of Beijing by October and another in Chongqing next year, while Chinese automakers like Great Wall and Changan are aggressively adding capacity.

The research firm Sanford Bernstein estimates that auto manufacturing capacity in China will rise 22 percent over the next two years, bringing it to 28.8 million cars, minivans and sport utility vehicles annually. That is almost equal to the American and European markets combined, and greater than even the most optimistic forecasts: that sales in China will reach about 25 million next year.

Automakers are expanding at a time when China’s economic growth has slowed to its lowest level in more than a quarter-century. China is closing coal mines across the country and plans to shutter steel mills. Exports are falling. Many Chinese cities are dotted with empty apartment buildings. Worried about pollution and traffic jams, China’s wealthiest metropolises have begun limiting the number of new cars that may be registered.

On the surface, auto sales in China seem strong. More Chinese families can afford cars and are flocking to showrooms. Sales of cars, minivans and sport utility vehicles jumped 8 percent last year from 2014.

The buyers are not just China’s college-educated, white-collar elite, but also the beneficiaries of the country’s roughly eightfold growth in blue-collar wages in the last dozen years. Zhou Genkou, a burly truck driver, recently waited in a Volkswagen dealership to pay $12,300 for a new white Santana sedan. He explained that he could not tolerate life without a car.

“It’s so that we don’t have to walk,” he said.

But there are signs that China’s yearslong auto boom is easing.

After car sales fell three months in a row, the Chinese government decided last September to halve the sales tax on cars with engines of 1.6 liters or less, to 5 percent through the end of 2016. The main beneficiaries have been domestic Chinese automakers, mostly affiliated with municipal or provincial governments, that churn out cheap subcompacts with small engines.

A similar tax reduction produced strong sales in 2009 and 2010. But it mainly encouraged consumers to buy sooner. When the tax cut expired, sales essentially leveled off for the next two years.

With the current tax reduction scheduled to end, “2017 will be a very difficult year for the auto industry, probably no growth,” said Yale Zhang, the managing director of Automotive Foresight, a Shanghai consulting firm.

Multinationals are focusing more on higher-profit segments that are growing without help from such incentives. But they are also finishing up a factory-building spree that started three years ago, when the economy was healthier.

“We see China moving to a pace of what I would call moderate growth,” said Matthew Tsien, the G.M. executive vice president who oversees the company’s China business.

Volkswagen forecasts that China’s auto market will grow slightly faster than the overall economy this year and slightly slower than the overall economy for the rest of the decade. G.M. is forecasting that the market will grow a little less than 5 percent a year through the end of the decade, the equivalent of adding the entire auto market of Japan, or five Australias.

Both automakers are planning to meet much of that growth with factories they have already commissioned or will soon finish. But if the economy weakens significantly, the industry could get stuck with a large amount of excess capacity.

“Are manufacturers going to keep the rose-colored glasses or get real? Most of the multinationals are going to get real and slow down the new capacity,” said Bill Russo, former chief executive of Chrysler China and now a consultant. “I’m not sure about the local manufacturers. They have a ‘Field of Dreams’ and ‘build it and they will come’ mentality.”

Chinese auto industry leaders shrug off such concerns. “They see the small-car market as having a lot of potential,” said Cui Dongshu, the secretary general of the China Passenger Car Association.

The Chinese economy needs continued strength in the auto market. The government wants to shift to a new, more sustainable model for growth based on consumer spending.

Since 2009, China has depended heavily on a loan-fed surge in construction of ever more highways, rail lines, factories and other investments. But that has produced a mountain of debt, particularly at state-owned enterprises.

Strong auto sales helped China attain a little-noticed milestone in recent months. Overall retail sales of consumer goods in China surpassed such sales in the United States, according to official data.

If sales do slow sharply, the question is whether multinationals and domestic automakers will try to start exporting more from their Chinese factories. The facilities are among the most advanced in the world, not least because they are also the newest.

G.M. and other automakers could in theory try to export more cars to the United States, which is also a relatively healthy market. One potential obstacle, however, is that China’s surplus capacity is mainly in subcompact cars, for which Americans have little appetite.

G.M. is already preparing to start shipping a new car-based sport utility vehicle, the Buick Envision, from China to the United States, from a factory in northeastern China. The arrival of the Envision, which is being built only in China, Buick’s biggest market by far, will be the mass market debut of Chinese-built cars in Big Three showrooms in the United States.

The preferences of Chinese consumers tend to be different from those of American buyers. Chinese customers, for example, are highly prone to complain if fabrics and other materials in a car’s interior do not smell quite right, according to surveys by J. D. Power & Associates. Many in the auto industry have said they will be watching how American buyers respond to Chinese-built Envisions.

“So will we,” said Mr. Buetow of G.M.

GM, Ford China Car Sales Decline in February

The Wall Street Journal, March 7, 2016

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Many car makers posted declining sales in China in February. Above, a SAIC-GM-Wuling Automobile manufacturing plant in Qingdao, Shandong Province. Photo: European Pressphoto Agency

By Christina Rogers

General Motors Co. and Ford Motor Co. both posted steep sales declines in China last month on a year-over-year basis, part of a wider slowdown attributed in part to a drop-off around the Lunar New Year holiday.

Sales for both U.S. car makers fell 9% in February, the companies said, following a string of monthly gains driven by new government subsidies introduced late last year to stimulate demand for fuel-efficient cars.

China’s auto market has bounced back from a slump in the summer of 2015 due to the incentives, which can be applied to 70% of cars sold in the country. But the recent sales declines raise a potential red flag, signaling the world’s largest new-car market could be permanently cooling amid the country’s slowing economic growth.

Through the first two months of 2016, GM and Ford sales rose 11% and 18%, respectively, the companies said. Analysts typically look at January and February sales together to account for the disruption caused by the New Year holiday. The China Association of Automobile Manufacturers will report official February new-vehicle sales in China for all car makers later this month.

Other auto makers also posted declines in February, including Hyundai Motor Co. and Mazda Motor Corp. Sales for SAIC Corp., China’s largest domestic auto maker, dropped 7%, dented by declines reported by joint-venture partners GM and Volkswagen AG , both market leaders in the country.

China car-sales reached a new high in 2015, rising 7.3% from a year earlier to 24.6 million. But the growth rate was slower than the double-digit gains recorded in 2013 and 2014.

The China auto makers’ association projects passenger-car sales in 2016 will expand 7.8% to 22.76 million. Car makers have rushed to build factories and boost production in China, hoping to tap surging demand for new cars created by a rising middle class and rapid urbanization in what is considered one of the industry’s most profitable markets outside the U.S.

January was a particularly strong month for auto makers in China, with sales up 9.3% from a year earlier, as buyers snapped up new-cars before the holiday. Travel tends to be heavy around the holiday, contributing to a decline in showroom traffic last month.

“It’s like a vacuum effect in February,” said Nigel Griffiths, chief automotive economist for researcher IHS Automotive. March results will be the real test to see whether demand created by the government stimulus is starting to fizzle, Mr. Nigel said.

IHS Automotive has issued a cautious forecast for new-car sales in China this year, with growth likely to benefit only certain auto makers. Demand is also starting to shift to local brands with a number of global auto makers posting weaker sales of late.

Ford has 4% of the market in China and recently completed a $5 billion expansion to build new factories and add models. The Dearborn, Mich., auto maker also plans to spend another $1.8 billion on research and development there. GM, Ford’s crosstown rival and among the largest sellers in China, is also trying to increase market share with new models and an expanded lineup of Cadillac luxury vehicles.

“It is a very densely crowded market,” particularly on factory capacity, that can dent sales and profits across auto makers, said Bill Russo, a managing partner with consultants Gao Feng Advisory.

Government tax incentives are helping to prop up new-car demand in China this year but the subsidies only last through December, analysts say.

Bill Russo to Join Panel Discussion at Global Automotive Forum

Wuhan, China, October 16, 2014

TOPIC:

The Transformation of China’s Auto Dealers

Auto dealers in China thrive on new car sales and highly profitable repair services. What opportunities and challenges do dealers face with the growing number of vehicles on the road, increased competition, the internet, and the establishment of more independent repair shop chains?

  • Relationship between e-commerce through the internet and the current sales channels.
  • Transformation from a “commodity economy” to a “customer economy” by applying big data technology.
  • Standardization of the used car market.

Hu Bo, Chief Marketing Officer, Greater China and the ASEAN regional, Volkswagen

Liu Zhifeng, Executive Deputy General Manager of Beijing Hyundai, China Group ChinaChina

Pang Qinghua, Chairman of Pangda Group, China

Bill Russo, Managing Director with Gao Feng Advisory Company, China

 

Moderated by,

Ma Xiaowei, President of Iautos.cn, China

The panel will be held at 3:15pm in Qin Tai Hall at the East Lake International Conference Center