2.23.2015

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

2.15.2015

Too Many Car Factories in China?

Bloomberg News, 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.

2.12.2015

The Evolution of Automotive Suppliers

Gao Feng Insights Paper, February 2015


Industry observers tend to overlook the changing role and structure of the automotive supply base. Of course, the story of success in the market is often viewed through the retail sales volume of branded OEM products. However, over the course of several decades, automakers have grown increasingly reliant on an ever smaller number of large tier 1 suppliers to deliver the core technology and innovation needed in the marketplace.
As a result, automakers face new challenges to maintain a balance of power with this new breed of supplier. In addition, suppliers at all tier levels must establish a position of relevance in a supply chain dominated by such power players. And finally, tier 1 suppliers must continue to anticipate the trends and development in the marketplace and upgrade their portfolio of capabilities in order to press their advantage.
In this analysis, we describe the trends, highlight several case examples, and discuss the implications of these developments along four strategic themes.
Thought leadership is core to what Gao Feng does.  We will, from time to time, share with you our latest thinking on business and management, especially as it relates to China and China’s role in the world.
Bill Russo
Managing Director, Gao Feng Advisory Company
bill.russo@gaofengadv.com
Chee-Kiang Lim
Principal, Gao Feng Advisory Company
ck.lim@gaofengadv.com
Tel: +86 10 8557 0676 (Beijing); +852 2588 3554 (Hong Kong); +86 21 5117 5853 (Shanghai)
Gao Feng website: www.gaofengadv.com

2.06.2015

Qoros Names Former Head of GM China Operations as CEO

The Wall Street Journal, February 3, 2015

Phil Murtaugh in Los Angeles on March 16, 2012. Photo: Reuters
By Colum Murphy

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

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

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

In an October interview, Mr. Guo said that awareness of the new Chinese auto brand in China was falling below company expectations. Anning Chen, a Chery executive, has succeeded Mr. Guo as chairman.

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

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

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

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

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

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

Corrections & Amplifications
Qoros is a joint venture between China-based Chery and Singapore-based Kenon Holdings, which was spun off from Israeli investment firm Israel Corp. last month. An earlier version of this article incorrectly said Qoros’s foreign partner was Israel Corp.

Click here to read the article at wsj.com 

1.28.2015

Restructuring will set stage for new golden age of China's auto industry

South China Morning Post, January 21, 2015



The old automotive industry model - a way to provide mobility for middle-class consumers - no longer 
fits the Chinese context, creating opportunities for innovation.
After a decade of breathtaking growth, China surpassed the United States as the world's largest automotive market in 2009. Since then, in spite of a recovery in US sales, China has widened the gap, with sales of 23.5 million vehicles compared with 17 million in the US. 

However, the 7 per cent growth of last year was about half that achieved in 2013. In fact, China has witnessed single-digit growth in three of the past four years, prompting many market followers to label this the "new normal". Some say the best times for China's automotive industry are now in the past. 

Indeed, there are many reasons to worry. In addition to the overall slowdown of China's economy, a growing number of cities are implementing curbs on car sales, seeking to address concerns about congestion and emissions. Last month, Shenzhen joined a growing list of cities, including Beijing, Tianjin , Shanghai, Guangzhou, Hangzhou and Guiyang , in an effort to cut the growth of the car population by limiting purchases. 

Meanwhile, the rising inventory of unsold vehicles has prompted the China Automobile Dealers Association to openly challenge global brand-name manufacturers, including BMW and Toyota, to increase incentives to their dealers and lower sales targets for 2015. While there is certainly cause for concern in the near term, we believe China's auto market is moving into a new phase, one that still offers the most profitable growth opportunities in the world for both local and global carmakers. Indeed, China's auto industry is on the cusp of major change that will fundamentally reshape things, bringing both opportunities and challenges. 

The age of inefficient, asset-driven growth is over. Overall, there is a capacity bubble after some manufacturers over-estimated growth prospects.  The problem is worst at the middle and lower end of the market. An already hyper-competitive environment will become more cutthroat as manufacturers try to undercut competitors' prices to sell excess stock.

Restructuring China's auto industry is essential to ensure its stable and healthy development. Government policies were implemented over 30 years ago to allow China to acquire the capabilities and capital from foreign sources to build up its domestic industry. While this has helped spur overall growth, it has not yielded a strong base of domestic carmakers. Consolidation and the elimination of weaker brands is inevitable. 

China's automotive industry will continue to expand, but at a more sustainable rate, with a steady stream of first-time purchasers from lower-tier cities joining the repeat buyers and those upgrading in the more established regions.  

A more "binary" market will emerge, with consumers in upper-tier cities continuing to prefer global brands, while those in lower-tier cities will seek no-frills products.  

However, pockets of "new wealth" will emerge in lower-tier cities, too, and these people will begin to mimic the buying patterns of more affluent customers.  

This presents unique opportunities for both foreign and domestic manufacturers. For example, Ford and Great Wall anticipated the shift towards small SUVs and have been enjoying above-average growth. Likewise, European luxury carmakers, such as Audi, BMW, Mercedes-Benz and Land Rover, have seen sales rise exponentially in recent years as a result of the growth in the number of high-net-worth consumers. 

In future, new segments, such as crossover and multi-purpose vehicles, may emerge but they may not be as large or as profitable as the SUV/luxury sectors. Thus, we believe a new golden age is on the horizon for China's auto industry. China remains the largest and fastest-growing automotive market in the world. After years of advances in mobile connectivity, big data and social networks, "internet of vehicles" technology is now shaping the industry as "connected mobility" drives advances in navigation, analytics, driver safety and driver assistance. 

The old automotive industry model - a way to provide mobility for middle-class consumers - no longer fits the Chinese context, creating opportunities for innovation.  

A new solution to personal urban mobility is likely to emerge in China, given the scale of its urban transport challenges and increasing concerns over the environmental impact of conventional vehicles. Indeed, the traditional car-ownership model is being reshaped by urbanisation, the rising aspirations of young consumers, and the development of communications technology and "big data".  

A number of new concepts are emerging, bringing non-traditional players, many of whom are Chinese, into the ecosystem. Examples include taxi-hailing apps such as Alibaba's Kuaidi Dache and Tencent's Didi Dache, which each process over 5 million transactions a day. 

As the leading automotive market, China is poised to revolutionise the global car industry, ushering in the next age of smart vehicles and connected mobility.  

Edward Tse is founder and CEO, and Bill Russo is managing director, at Gao Feng Advisory Company, a global strategy and management consulting firm with roots in Greater China

Click here to read this article at SCMP.com 

Toyota Isn't in Tune With China's Needs: Russo

Bloomberg Television, January 22, 2015

Gao Feng's Managing Director Bill Russo discusses China's car market snd why the country is so important for automakers with Bloomberg's Rishat Salamat on "On The Move".




http://www.bloomberg.com/news/videos/2015-01-22/toyota-isn-t-in-tune-with-china-s-needs-russo

Toyota Poised to Lose Global Sales Lead to VW on China

Bloomberg News, January 22, 2015



Toyota Motor Corp., which fended off Volkswagen AG to remain the world’s top automaker in 2014, may lose the sales crown as early as this year as it falls behind in China, the world’s biggest auto market. 

Toyota is predicting its global deliveries will decline 1 percent in 2015 to 10.15 million vehicles, or just 10,000 units more than what Volkswagen sold worldwide last year. A new factory the German company is opening this year in Changsha, China, will add capacity for another 300,000 vehicles annually. 

As Volkswagen and General Motors Co. add factories to bolster their already-dominant position in China, Toyota President Akio Toyoda’s strategy of foregoing new car plants until at least next year could result in the first shakeup in auto-sales leadership since 2011. Toyota ranks sixth among global automakers in China and sells less than one-third as many vehicles as its two main competitors in China. 

“The difference is that Volkswagen has a jet engine strapped to its back called ’China’,” said Bill Russo, Shanghai-based managing director at Gao Feng Advisory Co. “Toyota, unfortunately, is in a position of weakness when it comes to the China market. It would be almost impossible to hold on to a number one position without being in the lead in China, and Toyota’s not even in that league.” 

Worldwide sales for Toyota, including at its Hino Motors Ltd. and Daihatsu Motor Co. units, climbed 3 percent to 10.23 million vehicles in 2014, according to a company statement. Volkswagen last week reported a 4.2 percent gain to 10.14 million vehicles, that included its two heavy-truck units. GM followed with sales of 9.92 million units, up 2.1 percent. Volkswagen and GM haven’t announced projections for this year. 

China Capacity 

Toyota, which hasn’t built an assembly plant in China since 2012 and faces a self-imposed moratorium on new factories until next year, will fall behind even further as Volkswagen and GM step up their expansion plans. 

GM has announced plans to add five new plants in China by 2018 even though President Dan Ammann said the market is “maturing rapidly.” 

Volkswagen expects to raise its China plant capacity to more than 4 million vehicles by 2018 from 3.1 million at end 2013, according to the company. Mainland China and Hong Kong accounted for a record 3.67 million deliveries at Volkswagen group last year, up 12.4 percent and extending the country’s lead as the German manufacturer’s largest single market. 

Sales Target 

By comparison, Toyota missed its sales projection for 1.1 million units in China in 2014, even as the Corolla and the Levin compact cars helped boost sales 13 percent to 1.03 million units. The company kept its China sales target unchanged for this year. 

Even though Toyota may cede the sales leadership, it still outearns Volkswagen. Analysts estimate Toyota earned a profit of 1.96 trillion yen ($16.7 billion) last calendar year, compared with 10.7 billion euros ($12.4 billion) at Volkswagen. 

“Their focus is not No. 1,” said Peggy Furusaka, a Tokyo-based auto-credit analyst at Moody’s Investors Service. “Toyota is more concerned about keeping profitability than chasing numbers. So for coming years, I wouldn’t be surprised to see Toyota selling fewer cars than Volkswagen.” 

Toyota’s also-ran status in China is compounded by threats by its dealers to drop out of its network, citing poor sales and a lack of profit. 

Dealer Threats 

As many as 10 percent of dealers for one of Toyota’s China ventures could abandon the brand, according to the China Automobile Dealers Association. Among the 523 distributors in the FAW-Toyota Motor Sales Co. group, 95 percent are losing money, with some dealers stopping sales or shutting down altogether because of the losses, the state-backed dealer’s group said. 

Vehicle sales growth slowed last year in China in tandem with the nation’s weakest economic growth since 1990. Deliveries are forecast to gain 8 percent to about 21.3 million passenger vehicles this year, according to the state-backed China Association of Automobile Manufacturers. 

“As long as China is growing rapidly, Toyota will need to build new factories there,” said Yoshiaki Kawano, an analyst with IHS Automotive in Tokyo. “They are probably reserving some energy for growth in the longer term, as they are trying to improve the efficiency at their existing plants.” 

To contact Bloomberg News staff for this story: Alexandra Ho in Shanghai at aho113@bloomberg.net; Ma Jie in Tokyo at jma124@bloomberg.net; Masatsugu Horie in Osaka at mhorie3@bloomberg.net

To contact the editors responsible for this story: Chua Kong Ho at kchua6@bloomberg.net Suresh Seshadri 

http://www.bloomberg.com/news/articles/2015-01-21/toyota-poised-to-lose-global-sales-lead-to-vw-on-china