Volkswagen in Talks to Make Electric Cars in China

The Wall Street Journal, September 7, 2016

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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.

Bill Russo to Chair Future Mobility Panel at JP Morgan Global China Summit

Beijing China, June 14, 2016

The Future of Mobility:  China’s Automotive Industry in the Age of Disruption

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The traditional automotive industry, where technology innovation has primarily been focused on powertrain and safety systems, must now contend with new forms of mobility services that are transforming the manner in which we experience the product.   The particular conditions of urbanization, an ever-expanding middle class population, pollution, and congestion are uniquely challenging in China, which may create opportunities for innovative new mobility solutions for China.

 The conventional hardware-centric, sales-driven, asset-heavy and ownership-based business model with sporadic customer interactions is now competing with a connected, on-demand, and often personalized mobility experiences.  This new form of “connected mobility” is driving new technologies in the world of navigation, analytics, driver safety, driver assistance and information virtualization.

China’s automotive industry is at the forefront of disruption as the driving forces are much more apparent in China than that in the rest of the world:   Urbanization. A Growing Middle Class. Pollution. Grid Lock.

How are these factors shaping the auto market in China?  What solutions are being developed to ease mobility “pain points” in China?  How do you see these solutions impacting and shaping our everyday lives today and in the future?  How will this impact the structure of the industry going forward?

Innovations such as these, originating from both traditional OEMs and new mobility solutions platforms, many of whom are Chinese, could pave the way to a an entirely new business model for China’s auto industry.

Topics for discussion:

  • Defining the disruption in the China context – What are the disruptive trends in the world of mobility?
  • Big picture view of the competitive landscape – What does the new competitive landscape look like and how will it evolve?
  • How should incumbents respond? Disrupting or being disrupted? – What new internal capabilities are required? How to work with local start-ups:  compete or collaborate?
  • China for the world – Will China lead to world’s development and innovation in Connected Mobility?

Ms. Jean Liu, President, Didi Chuxing

Mr. Hubertus Troska, Member of the Board of Management, Daimler AG; Chairman & CEO, Daimler Greater China

Mr. Matt Tsien, President & CEO, General Motors China

Mr. Carsten Isensee, EVP of Finance, Volkswagen China

 

Moderated by:

Mr. Bill Russo, Managing Director, Gao Feng Advisory Company

China Seen Laying Down $15 Billion Bet on Electric Vehicles

Bloomberg News, December 16, 2015

China to be `epicenter of electrification,’ analyst says

BYD, Zotye among biggest sellers of electric cars in China

China has found electric cars a tough sell even after lavishing consumers with subsidies and privileges. After almost certainly failing to meet a target to have half a million of such vehicles on its roads by year end, its next act is to achieve a 10-fold increase by the end of the decade.

The electric vehicles in service will fall about 26 percent short of its year-end target, according to estimates from the science ministry and state-backed auto association. To meet its 2020 goal of five million EVs, the government will speed up the construction of charging stations, reducing a major inconvenience for urban residents who don’t have personal garages to charge their cars.

“China will be the epicenter for electrification of the auto industry globally,” said Bill Russo, Shanghai-based managing director at Gao Feng Advisory Co., who estimates that China would have invested 100 billion yuan ($15.5 billion) by 2020 on new-energy vehicles.

President Xi Jinping has designated electric vehicles as a strategic initiative in a bid to upgrade the auto industry and create challengers to Toyota Motor Corp. and General Motors Co. The government is increasing spending after signs that the combination of research grants, consumer subsidies and infrastructure investments is starting to yield results. New-energy vehicle production surged fourfold to 279,200 units in the first 11 months, even as oil traded near levels last seen during the global financial crisis.

Local Winners

That has benefited automakers like BYD Co., Zoyte Auto and BAIC Motor Corp., which have led sales of electric cars. BYD, backed by Warren Buffett’s Berkshire Hathaway Inc., would have turned a loss in 2014 and this year if not for EV subsidies from the central government, according to Barclays Plc. Geely Automobile Holdings Ltd. said last month that it would target new-energy vehicles to make up 90 percent of sales by 2020.

The government incentives have lured consumers like Zhang Peng, 30, who decided to buy BAIC’s EV200 electric car after trying without success for two years to win a license plate in the bimonthly lottery held by the Beijing government. EVs are exempt from the ballot, which has worse odds than roulette.

Zhang also received 90,000 yuan in matching grants from the central and local governments, or almost half of the 208,922 yuan sticker price for BAIC’s EV200 electric car. The model costs about 7.5 yuan to run every 100 kilometers (62 miles), compared with an estimated 39 yuan for an equivalent gasoline-powered 1.6-liter Toyota Corolla, according to calculations based on the published fuel-economy rating and Beijing pump prices.

Battery Suppliers

The burgeoning demand has also helped battery suppliers such as South Korea’s Samsung SDI Co. and LG Chem Ltd., which supplies SAIC Motor Corp. and Chongqing Changan Automobile Co. Panasonic Corp. said it is considering building a car-battery factory in China to supply lithium-ion batteries.

Among local component makers, Wanxiang Qianchao Co. and Hunan Corun New Energy Co. have more than doubled in Shanghai trading this year as investors bet the surge in electric vehicle demand will boost demand. BYD has climbed 34 percent this year and Geely Automobile has surged 79 percent in Hong Kong trading, compared with the 8.4 percent decline in the benchmark Hang Seng Index.

Global automakers are beginning to get into the act. Volkswagen AG, the largest foreign carmaker by sales, has said it will introduce 15 locally produced new-energy vehicles in the next three to five years in the country. Ford Motor Co. said this month it’s investing $4.5 billion globally in electrified vehicles.

‘Foreigners Coming’

“In the initial stage it was mainly local automakers competing with each other in the electric-car segment, but now the foreign players are coming,” said Ouyang Minggao, director of the Tsinghua New Energy Vehicle Center. “All kinds of electric cars will be here soon, including plug-in hybrids, which will lead to very big challenges to local automakers.”

The Chinese government is not alone in setting aggressive targets for alternative-energy transportation. President Barack Obama in 2011 called for one million electrified vehicles in the U.S. by 2015, a target that the administration scaled back in March after low gasoline prices reduced the cost advantage of plug-in and hybrid vehicles.

China, though, has stood out in terms of the scale of the state’s financial support. The country has invested about 37 billion yuan into the new-energy vehicle segment over the past five years, according to Gao Feng’s Russo, who estimates the government will devote another 63 billion yuan by 2020.

Funding Plan

The central government released a plan on Wednesday detailing funding for local governments to construct charging facilities, tied to the number of new-energy vehicles they sell.

Automakers will have to play by China’s rules if they want a piece of the market, even if they don’t believe in electric cars. The government has mandated the lowering of average fuel consumption to 5 liters by 2020, from 6.9 liters per 100 km this year.

“There is really no choice for the automakers, if they are required to meet the more stringent emission standards by 2020,” said Steve Man, an analyst with Bloomberg Intelligence. “Other technologies with the stringent emission standards won’t get you all the way to target.”

Ripples of emissions scandal felt in China

Nikkei Asian Review, October 1, 2015

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The U.S. limits nitrogen oxide emissions to half the amount allowed in Japan and Europe. © Reuters

Click here to view the article at Nikkei Asian Review

SHANGHAI/BEIJING — On the face of it, Volkswagen’s diesel scandal should have little impact in China, the company’s largest market, as none of the models involved are sold in the country. However, the German manufacturer, which through its joint ventures with local automakers SAIC Motor and FAW Group has seemed to be able to sell anything with a VW badge, may be facing a profound change in attitudes among Chinese consumers.

     Last year, the Volkswagen Group sold 3.68 million cars in China, accounting for a market-leading 15.7% of sales in the country. Since VW established its first joint venture with SAIC in 1984, the company has sold few diesel vehicles in China. FAW-Volkswagen put out a statement Sept. 24 saying that none of the models being investigated by U.S. authorities have been sold in China.

Diesel plan denied

In 2013, VW raised the idea of introducing new diesel models — of the type involved in the current scandal — to China. “Bosch and VW have lobbied the Chinese government to adopt diesel technology to absorb the extra diesel engine and parts production capacity in the EU, but after this event, diesel will not be an option for future fuel efficiency,” said Zhou Jingzhe, director for China and Korea at IHS Automotive Advisory Service.

“The belief that German cars are the most technologically advanced in the world has been damaged,” said a VW salesperson in Beijing. “We are going to have a hard time from now on.”

FAW-Volkswagen sales tumbled 14% on the year in the year to Aug. 31. “We may well need to re-revise our sales target downward for this year,” said an official at one of VW’s joint ventures.

“I had already decided not to buy [another] Volkswagen before this news,” said Jimmy He, a Chengdu-based businessman who previously bought a VW Tiguan SUV. “Different models of Volkswagens are quite similar in design and are quite ordinary.”

     “The immediate impact [of the rigged emissions tests] on sales in China may be limited, but questions may have been raised in the eyes of consumers with regard to their perception of the trustworthiness of the VW brand,” said Bill Russo, who previously oversaw Chrysler sales in China and is now a managing director at Gao Feng Advisory in Shanghai.

The online buzz has been very critical. “They must be underestimating Chinese consumers,” said one commenter. Said another: “Volkswagen has been my favorite brand of car, but now I’m disappointed. From now on, I’ll buy Chinese or Japanese cars.” Another person wrote, “It turns out that German companies are just as untrustworthy as Chinese companies.”

Under the microscope

Sources at VW’s Chinese joint venture partners say they are already receiving inquiries from government officials regarding emissions and other quality measures. “If they discover any flaws or misconduct at such a global company as VW, it would give them a huge career boost,” said one executive. “Our fear is that those government officials will intensify their scrutiny.”

Another potential threat comes from investigative reports by state-controlled media, such as China Central Television, which in March highlighted a problem with VW’s automatic dual-clutch gearboxes two years ago and other issues regarding the carmaker.

“Of course [the new scandal] will remind Chinese consumers of the [dual-clutch gearbox] and axle problems,” said Jochen Siebert, managing director of JSC Automotive, a China-focused consultancy. “[But] so far, VW has managed to get over these problems, and this time won’t be different. I believe that China and the Chinese have bigger fish to fry and will get on with their lives and other topics, so it will not have a lasting impact in China.”

     But the scandal could trigger a shift in perceptions among Chinese consumers. They have tended to favor German cars, believing them to be better than U.S. and Japanese models. “Due to the arrogance and cheating with diesels, VW is stepping down from the altar,” Zhou said.

VW Emissions Scandal Spreads to Asia as Korea Begins Probe

Bloomberg News, September 22, 2015

Click here to read this article at bloomberg.com

The fallout from Volkswagen AG’s admission that it had cheated on emission tests in the U.S. is spreading to Asia, as South Korea said it will check whether the German automaker complied with its pollution standards.

South Korea will test emissions on diesel versions of VW’s Jetta, Golf, and Audi AG’s A3 sedan in October, Park Pan Kyu, deputy director of the country’s environment ministry, said by phone. The investigation will involve about 4,000 to 5,000 vehicles that were imported to Korea since 2014, Park said.

“We found it necessary to review the emissions of the models under probe in the U.S., although the U.S. has a more rigid emissions standard than Korea does,” Park said. “We have no plans at the moment to expand the investigation to other makers or models but will continue to closely monitor the situation.”

South Korea is reviewing Volkswagen’s compliance after the company admitted to systematically cheating on U.S. air pollution tests, while Germany said it may investigate the matter. Europe’s biggest carmaker derived about 40 percent of its volume sales last year from Asia, home to its largest market China.

“The bigger concern is how it impacts their European reputation, which is much more important market for them, particularly in diesel,” said Janet Lewis, Hong Kong-based analyst at Macquarie Group Ltd. “To the extent that they can’t grow their U.S. business in their quest to be the No. 1 automaker by 2018, they therefore become more reliant on the China market.”

Deliveries of Volkswagen in China fell 5.8 percent in the eight months through August. Industrywide passenger-vehicle sales in the country climbed 6.3 percent in the same period, according to the China Passenger Car Association.

More than 90 percent of about 25,000 vehicles VW sold in South Korea this year through August were diesel models, according to Korea Automobile Importers & Distributors Association data. They included the models under probe in the U.S.

Shares of both Hyundai Motor Co. and its affiliate Kia Motors Corp. rose 3.1 percent in Seoul on Tuesday after brokerages including Samsung Securities Co., IBK Securities Co. and KB Investment & Securities co. said the South Korean carmakers may benefit from VW’s woes.

“It seems inevitable that Volkswagen’s image gets tarnished and sales fall,” Lee Sang Hyun, an analyst at IBK Securities Co. wrote in a report. “We expect Hyundai Motor Group to benefit from VW’s recall.”

In China, VW sells gasoline versions of the models involved in the U.S. probe. The automaker didn’t respond to a request for a breakdown on the diesel models it sells in China or whether the regulators have contacted it about the U.S. admission.

“The way the system works in China is that it triggers a review, when somebody has a problem related to regulatory compliance in one market,” said Bill Russo, Shanghai-based managing director at Gao Feng Advisory Co. “It raises some question of whether the practices that led to that problem could exist in another market so it could cause other government organizations to take another look and see if in fact they’re complying.”

The General Administration of Quality Supervision, Inspection and Quarantine didn’t immediately reply to a fax seeking comments on whether they will inspect VW. Calls made to the media department of Chinese Ministry of Environmental Protection went unanswered.

New Zealand isn’t aware of any issues with vehicles sold in the country that are compliant with European or Australian standards, Transport Minister Simon Bridges said in an e-mailed response. Australia’s transportation regulator said it’s seeking clarification from Volkswagen as to whether vehicles supplied to the Australian market utilize similar software to that used in the U.S.

There’s no emission issue yet in Malaysia, said Madani Sahari, chief executive officer of Malaysia Automotive Institute. Singapore’s National Environment Agency said it’s working on a response. Taiwan’s air quality regulator said it’s checking with VW’s local agent on imported cars.

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.

China car market braced for abnormal era of flat sales

The Financial Times, July 27, 2015

China car market braced for abnormal era of flat sales - FT.com Mail, Today at 6.03.00 PM

On the eve of China’s largest car show in April, executives and analysts braced themselves for a “new normal”: single-digit sales growth after two fat years. Yet some are beginning to wonder if the world’s largest car market is actually entering an abnormal era of flat or even falling sales.

The catalyst for this pessimism was a sharp fall-off in year-on-year sales — 9.4 per cent higher in March, but 3.4 per cent lower by June than the same month last year, according to wholesale figures compiled by the China Association of Automobile Manufacturers. It was the industry’s first decline since early 2013.

Coupled with an economy growing at its slowest annual rate in 25 years and the recent crisis in China’s stock markets, the outlook appears bleak for an industry that has been a cash cow for mass market and premium car brands for the past five years.

“It will be quite challenging for carmakers because the market is cooling and the trend will not be reversed anytime soon,” says Teng Bingsheng, a professor at the Cheung Kong Graduate School of Business in Beijing.

Analysts at Barclays recently revised their 2015 outlook for passenger car sales growth sharply downward, from 8.5 per cent to 1.7 per cent.

Bernstein Research warned that “we’ll need a stronger word than ‘moderation’ to describe the industry’s challenges”.

Marques as diverse as BMW and Volkswagen have reported falling sales. VW experienced a 3.9 per cent fall in first-half group sales to 1.7m units — the first decline in nine years. BMW also caved in to dealer demands for bigger subsidies — a concession since made by others — while its Chinese joint venture partner issued a profit warning on July 13.

For VW, the pain is exacerbated by having just one mass-market SUV on offer in China at a time when the fast-growing segment accounts for one-third of all passenger car sales.

“That’s clearly been a huge miss on their part,” says Janet Lewis, analyst at Macquarie in Hong Kong. “A lot of first-time buyers are in central and western China where road quality is not as good and there’s more focus on the higher ride that you get with an SUV.”

GM, however, bucked the trend with a 2.6 per cent rise in first-half China sales, helping to send its shares up more than 4 per cent after it reported second-quarter earnings on Thursday.

The US automaker bolstered the view of analysts who say China’s car industry is simply maturing, with growth shifting to smaller cities in the country’s vast interior and increasingly driven by new model launches. The market is merely becoming more competitive with lower profit margins, more in line with those in the US and Europe.

China car market braced for abnormal era of flat sales - FT.com Mail, Today at 6.04.46 PM

“It’s easy to be pessimistic when you start to see some year-on-year developments that are negative,” says Bill Russo, a Shanghai-based consultant who notes that car sales also grew less than 5 per cent in China in 2011 and 2012. “But we went through a softening a few years back and I remember having similar conversations about whether this was the big down cycle. It wasn’t.”

“Supply has caught up to demand,” he adds. “[Companies] are going to be giving away some of those very good margins they have enjoyed for quite a long time.”

That may squeeze shareholder payouts too. VW, for example, has seen an almost eightfold increase in the annual dividend it receives from its China joint ventures over the past five years, from €400m in 2009 to €3bn last year

China car market braced for abnormal era of flat sales - FT.com Mail, Today at 6.06.25 PM

Mr Russo’s less gloomy big picture is also supported by basic demographics, with only 52 passenger vehicles per 1,000 people compared with a global average of 150.

Incomes are improving too. According to GaveKal Dragonomics, a Beijing consultancy, the annual income of some 15m Chinese households will exceed $20,500 this year for the first time. Another 19m households will break through the $13,500 level.

As a result, Macquarie has adjusted its 2015 China car sales forecast only moderately, projecting an increase of 10 per cent from 7 per cent previously, and thinks the overall market will grow from 19.7m units last year to at least 32m by 2020.

But as competition intensifies, the biggest rewards will flow to the most cost-efficient carmakers with the quickest model cycles — just as they do in other markets. “It’s harder to sell something that’s older in China, particularly if people know the next model is coming,” says Ms Lewis.

Chinese brands regain market share
July began as June ended for the likes of BMW and Volkswagen, according to analysts at Bernstein Research, with falling year-on-year sales for the two German groups as well as General Motors and Ford’s China joint ventures.

Unexpectedly, traditional laggards including Mercedes-Benz and Japan’s ‘big three’ automakers have been reclaiming market share.

Chinese brands have also seen their share of total sales — currently 41.5 per cent — start to grow again after four consecutive annual declines.

BAIC Motor, Daimler’s main China joint venture partner, is planning on a 29 per cent increase in sales of its own brand cars this year, to 400,000 units. “Our domestic brand business is growing substantially and has exceeded our expectations,” Xu Heyi, BAIC chairman, said last week.

In one sense, Chinese brands simply endured their “correction” a year early, after experiencing steep year-on-year declines in 2014. Like the Japanese companies, whose sales were affected by spats between Beijing and Tokyo in 2012 and 2013, they are improving from a low base.

Mercedes, meanwhile, is reaping the fruits of a restructuring begun two years ago by Hubertus Troska, the China head of its Daimler parent unit, as it begins to catch up with traditional leaders Audi and BMW. Mr Troska’s changes unified a fragmented sales and marketing structure, bringing together separate channels for imported and domestically produced vehicles.

On Thursday, Daimler reported better than expected second-quarter results with an underlying margin of 10.7 per cent. “Mercedes now looks to be the most profitable of the ‘big three’ German premium brands, something inconceivable a few years ago,” said Bernstein’s Max Warburton in a research note. “Daimler management . . . must feel vindicated and delighted.”

Mercedes is also benefiting from a series of new product launches at a time when refreshing the model line-up is becoming essential in the world’s largest car market.

Macquarie’s Ms Lewis says the German company is in “about the sixth inning” of a strong new product cycle in China, with new GLC SUV and E-class sedans in its pipeline.

“Products tend to have a very short life cycle in China,” adds Mr Russo. “If it didn’t launch in the past 18 months, it’s unlikely to be hot. You’ve got to rake it in while you can.”

Additional reporting by Wan Li

Click here to read this at FT.com

Bill Russo Chairs Auto Panel Discussion at J.P. Morgan Global China Summit

Beijing, China. June 3, 2015

Bill Russo chaired a panel discussion with the the China CEOs from the top 3 premium carmakers at the 2015 J.P. Morgan Global China Summit.  The topic of the session was The Next Golden Age of China’s Automotive Industry.

Day 2 - Plenary - The Next Golden Age of China's Automotive Industry Safari, Today at 4.52.48 PM

Panelists:

  • Hubertus Troska, Member of the Board of Management, Daimler AG; Chairman & CEO, Daimler Greater China
  • Karsten Engel, President and CEO, BMW Group China
  • Dietmar Voggenreiter, President, Audi China
  • Chair: Bill Russo, Managing Director, Gao Feng Advisory

Click here to watch the video recording of the panel discussion

Click here to see the introductory slides

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.

 

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