In China, hybrids can't seem to sell without a lustrous nameplate

Nikkei Asian Review, December 19, 2013

A Lexus ES300h on display at a dealership in Shanghai.(Mark Andrews)

SHANGHAI -- Hybrid cars haven't been a big hit in China.
Shanghai rolled out 350 Buick LaCrosse Hybrids for use as taxis for the green-themed World Expo in 2010, but the cars disappeared soon after the exhibition ended.

Toyota infamously sold only one of its world-leading Prius models in China during the same year.

Sales of the utilitarian Prius have rebounded slightly but are still slow. Imported Honda gasoline-electric cars, meanwhile, have been faring worse.

Hybrids, however, are making inroads at the premium end of China's car market.

Toyota's luxury Lexus division is on track to sell close to 20,000 hybrids in China in 2013. Last year, it unloaded 16,000 of the things, leaving Prius sales way behind at 2,434.

Lexus last month pointedly unveiled the revamped CT200h model at the Guangzhou Auto Show rather than at shows going on at the same time in Tokyo and Los Angeles. Mercedes is also finding a welcome for its hybrid S-class sedans, though it isn't giving out figures.

"It is easy to sell these cars," a sales manager at a Shanghai Lexus dealership said, gesturing at the CT200h hybrid and other models. "We firstly emphasize the six-year warranty and secondly that it saves fuel."

Indeed, fuel economy has not been a strong selling point in China, where most car buyers are first-time purchasers.

Said Boni Sa, an automotive analyst at consultancy IHS Automotive: "For these first-time buyers, they have more to consider, like brand, vehicle size, features or safety. In an emerging market like China, to spend money on a better brand or larger model is much more reasonable than spending money on better fuel consumption."

Price is a key factor even for repeat buyers. In Chengdu, where the Prius is produced, businessman Jimi He recently bought his third car, a Volkswagen Tiguan crossover.

"I'd love a hybrid," He said. "It is more environment-friendly and more energy-saving. However, the price is the key issue that stops me from getting one."

The argument that buyers will recoup the higher upfront cost of a hybrid through fuel savings is not so convincing in China. To recover the 12,000 yuan ($1,976) price premium on the hybrid version of SAIC Motor's locally developed Roewe 750 sedan, for example, would require driving the car at least 100,000 kilometers.

Some automakers had campaigned for Beijing to begin subsidizing gas-electric hybrid purchases this year. They argued this could be more effective in addressing pollution concerns than the government's generous subsidies for pure electric cars and plug-in hybrids, which have not generated significant sales. Instead, China in September renewed the existing subsidies.

So the carmakers are finding other ways to close the price gap. Toyota announced at the Guangzhou show that it will localize production of batteries and hybrid motors for the Prius and Camry Hybrid. These components are now imported and slapped with high duties. As it stands, for the price of a Prius, a Chinese buyer can get a much larger family car.

This is why hybrids are attracting buyers for whom price is less of an issue.

"Some customers are buying a Lexus SUV or a Mercedes-Benz S-class rather than hybrid vehicles," Sa said. "Hybrids' inflated costs can be ignored by these customers."
At the premium end, hybrids can be positioned as high-tech and top-of-the-range rather than fuel-saving and environmentally friendly.
A new Mercedes E400 hybrid is to offer a more powerful engine with better acceleration than that of the standard model.
"Premium carmakers have a higher chance of success in the area of hybrid vehicles, mainly because premium autos are not purchased by price-sensitive consumers" said Bill Russo, president and chief executive of automotive consultancy Synergistics in Beijing. "It is still a small market but will grow as more automakers slowly introduce more models."
The long wheel-base E-class Mercedes will be the first premium hybrid to be produced in China. Infiniti is set to begin producing cars in China 2014, and Lexus is a possibility.

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Car sales rev up to double speed in China

The Financial Times, December 15, 2013

After an uncharacteristic deceleration in 2012, the world’s largest car market is again growing at a double-digit clip, writes Tom Mitchell in Beijing.

LMC Automotive, a consultancy, estimates that sales of passenger vehicles in China from January to September increased 15 per cent to almost 12m units. That compares with expected growth of less than 8 per cent in the US for 2013, and projected year-on-year declines in Brazil, Russia, India, Germany and Japan.

China’s four richest urban centres seem to be overwhelmed with traffic congestion and related pollution issues.

But Beijing, Shanghai, Guangzhou and Shenzhen are just at the point where car ownership traditionally begins to take off – when per capita GDP reaches $10,000. According to Synergistics, another automotive consultancy, that figure in China’s “big four” regional car markets now stands at more than $12,700.

Moreover, manufacturers are turning their attention to the smaller cities where more than 80 per cent of the country’s 1.3bn people live and per capita gross domestic product is about $4,000.

“Congestion and pollution issues might have a negative effect [on growth in China’s largest cities], but [smaller cities] still have a lot of potential,” says Ray Bierzynski, executive vice-president of General Motor’s joint venture with SAIC Motor and Wuling Auto in Guangxi province. “Our expansion has got to be in those areas.”

In volume terms, GM is the second most successful multinational car company operating in China. Its joint ventures with SAIC, First Auto Works and Wuling sold 1.1m passenger vehicles over the first three quarters of this year, compared with Volkswagen’s 1.9m.

Analysts attribute GM’s and VW’s success in China to aggressive localisation of production, research and development – a tactic that automakers at the luxury end of the spectrum are also adopting.

Daimler formally opened an engine plant in Beijing in November – its first outside Germany – that will eventually export components to Europe.

Yet China has yet to emerge as a significant automotive exporter as Japan and Korea did before it, especially to the US and Europe. Over the first eight months of this year, China’s vehicle exports fell three per cent over the same period in 2012 to just 500,000 units.


Executive Moving to Shanghai Finds No Escape From China’s Smog

Bloomberg News, December 17, 2013

Source: ChinaFotoPress/Getty Images

People wearing masks walk along The Bund in Shanghai on Dec. 8, 2013.

Bill Russo moved more than 700 miles from Beijing to Shanghai on Dec. 1 and thought he’d left the smog behind him. Five days later, he was wheezing again.

“What was shocking was how bad it’s been,” said Russo, a vice president at car stereo maker Harman International Industries Inc. “Shanghai over the years had a reputation of being better,” said the executive, who had some of the fine-particle masks he left behind in Beijing sent to him.

Record levels of pollution this month busted perceptions of Shanghai as a place to escape the smog that’s shrouded Beijing and other parts of China. Worsening air quality in the country’s commercial hub prompted warnings to keep children indoors, spurred companies from Unilever to Uniqlo owner Fast Retailing Co. to give workers face masks, and may hinder Shanghai’s push to be a global financial center by 2020.

“I felt like I had dust in my mouth and throat all the time,” said Thomas Walser, a manager at a relocation company who moved to Shanghai from Austria in 2009.

After Shanghai ordered vehicles off the road and factories to cut production, Baosteel Group Corp. said it will limit processing of sinter, the iron ore nodules used to make steel. The company that controls China’s largest listed steelmaker also suspended outdoor operations of its chemical facilities.

Source: ChinaFotoPress via Getty Images
People wander at the Bund as heavy smog engulfs Shanghai on Nov. 7, 2013.

‘Land Blind’

To help address chronic flight delays, China ordered commercial pilots to learn to “land blind” in smoggy conditions. Starting next year, pilots flying to Beijing from the nation’s 10 busiest airports must be qualified to land when visibility falls below 400 meters (1,300 feet), the official China Daily said on Dec. 12, citing unidentified people at the Civil Aviation Administration of China.
Spring Airlines Co., China’s biggest carrier outside government control, said it’s training pilots to land in smog. Shanghai’s pollution earlier this month affected operations, the carrier said, declining to be more specific. Pilots in China need to be qualified to be able to land when visibility falls to 800 meters with runway visual range of 550 meters, said Spring Airlines Senior Vice President Shen Wei.

Shanghai’s air pollution index surged to a record 482 on Dec. 6, the worst since monitoring began last year. The air quality index monitored by the U.S. consulate surged past 500 to the “beyond index” level. For at least seven of the first 10 days of the month, the air was considered too toxic to allow children and the elderly outdoors.

Photographer: Peter Parks/AFP/Getty Images
An aircraft is barely visible through thick smog on the tarmac of Hongqiao airport 

Satellite Image

Levels of PM2.5 -- particles smaller than 2.5 microns in diameter that pose the biggest health risk -- were 602.2 micrograms per cubic meter, or about 24 times the World Health Organization’s recommended limit. A satellite image dated Dec. 7 on the NASA Earth Observatory website showed haze stretching from Beijing to Shanghai.

By Dec. 10, Shanghai’s government said air quality improved to “lightly polluted.” The pollution warning was removed yesterday Dec16 with PM2.5 levels dropping below the World Health Organization’s recommended 25 micrograms per cubic meter deemed to be safe for 24-hour exposure.

Unilever, the world’s second-largest consumer-goods maker, has distributed face N95 rated masks, which filter at least 95 percent of particles, to employees in Shanghai. On Dec. 6 it told most staff to work from home the following Monday, and a manager’s meeting scheduled for Dec. 10 was canceled.

Hotel Filters

Fast Retailing, operator of Uniqlo clothing shops, handed out masks to employees in Shanghai, the company said in a statement.

Because of the smog, InterContinental Hotels Group Plc’s 30 hotels in Shanghai will be cleaning their air conditioning systems more frequently, similar to what they do in Beijing, it said in a statement. In some hotels, staff will rotate air purifiers through the rooms.

In Beijing, air quality was worse than government standards on more than 60 percent of days in the first half, the Ministry of Environmental Protection said in July. Shanghai’s was below government standards on less than 35 percent of the days and had no days rated as “heavily polluted,” it said. The PM2.5 annual standard for cities is 35 micrograms, the report said.

The capital in January suffered its worst bout of air pollution with PM2.5 readings averaging 194 micrograms per cubic meter per day, with an intraday peak of 886 on Jan. 12.

Social Unrest

Exposure to PM2.5 contributed to 8,572 premature deaths in Beijing, Shanghai, Guangzhou and Xi’an in 2012, and led to economic losses of $1.08 billion, according to estimates by Greenpeace and Peking University’s School of Public Health. China has 16 of the 20 most-polluted cities globally, according to World Bank estimates.

Pollution has become the top cause of social unrest in China, Chen Jiping, a former leading member of the Communist Party’s Committee of Political and Legislative Affairs, said in March.

While the worsening pollution alone won’t stop companies from moving people to China, it has “a big impact” on executives with children, said Steve Mullinjer, regional leader for Asia and the Middle East at executive-search firm Heidrick & Struggles International Inc. The dirtier air “is restricting the type of people they can get or transfer or hire,” he said by phone from Shanghai.

The “living environment” is the top human-resources challenge facing European companies trying to retain talent in China, said Ioana Kraft, Shanghai-based general manager for the European Union Chamber of Commerce.

Pollution Apps

“I can’t recall it being so bad in the 10 years I’ve lived here,” said Kraft, who is originally from Germany. “Everyone was concerned: checking the pollution apps and buying masks. Then the masks were out of stock, the purifiers were out of stock.”

Sales of air purifiers on Alibaba Group Holding Ltd.’s Tmall site surged to as much as six times the daily average in the first week of this month.

3M Co., which donated face masks to kindergartens in Beijing as well as to traffic policemen in Shanghai, plans to increase production in China after stock sold out on Dec. 6 and 9, said Royce Hua, the company’s corporate communications chief in the country. That might take about three months to achieve, he said, declining to be provide more details.

Honeywell Purifiers

Honeywell International Inc., whose products range from aviation controls and auto turbochargers to solvents and medical devices, said respirator masks were sold out on its Tmall online store from Dec. 6 to 9.

Sales of building air filtration solutions and air purifiers made by the Morris Township, New Jersey-based company have grown more than 50 percent annually over the past several years, said Lydia Lu, a vice-president for communications. Honeywell has given masks to its staff and a local union is arranging for local employees’ to purchase air purifiers at a discount.

“The opportunity of being here is great because of the opportunity to be a part China’s economic development and contributing to that,” said Harman’s Russo. “The risk you put yourself in is that there are compromises you’ll have to make in terms of quality of life and the risk you’re taking to your health.”

“You can’t live in China, or Beijing in particular, for long before you realize that it’s having an impact on your health.”

To contact Bloomberg News staff for this story: Natasha Khan in Hong Kong at nkhan51@bloomberg.net; Alexandra Ho in Shanghai at aho113@bloomberg.net
To contact the editor responsible for this story: Frank Longid at flongid@bloomberg.net

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Peugeot agrees main terms of tie-up with China’s Dongfeng

The Financial Times, December 11, 2013

  • 1810: The Peugeot family business begins to put down its engineering roots as brothers Jean-Pierre Peugeot II and Jean-Frédéric turn their father’s grain mill into a steel foundry, making everything from coffee grinders to umbrella frames
  • 1882: The company turns to transport, making bicycles. The first was Armand Peugeot’s ‘Le Grand Bi’, or penny farthing bike
  • 1893: The Peugeot Type 5, which was powered by a two-horsepower engine, was produced from 1893 to 1896
  • 1913: The Peugeot 153, whose 2.6-litre, four-cylinder engine produced 12 horsepower, was made in various forms until 1925
  • 1929: Peugeot unveils its first mass-produced car, the 201, but sales were are hit by the Depression
  • 1934: The top-of-the-range Peugeot 601 rolled off production lines in 1934
  • 1940: After the Peugeot 402, produced from 1935 to 1942, the company is forced to build cars and weapons for the German war effort
  • 1962: The stylish Peugeot 404 cabriolet became a 1960s icon
  • 2010: Peugeot starts production of the fully electric iOn city car
  • Today: Robert Peugeot is chairman of FFP, an investment company through which the Peugeot family controls a 25 per cent stake in the car company ©Reuters

PSA Peugeot Citroën and China’s state-owned carmaker Dongfeng Motor have agreed the main terms of an industrial and commercial partnership that will include a large capital injection into the French group in return for technology sharing.

The two carmakers are still hammering out the details but the agreement is expected to involve a €3bn-€4bn capital raising by Peugeot and an agreement for the two groups jointly to develop and produce low-cost small cars for southeast Asian markets.

Peugeot hopes to be able to have the deal announced in the first quarter of next year, according to two people briefed on the discussions.

The French group is desperate to lower its over-dependence on the moribund European car market and is rapidly burning through its capital reserves. Both Peugeot and Dongfeng declined to comment.

Peugeot closed down the first large car factory in France for 30 years this year and reduced its workforce as it seeks to reduce the €3bn cash burn it suffered in the full year 2012. It recently hired a former Renault executive to lead a more globalised push.

The company already has a successful joint venture with Dongfeng building cars in China, but trails rivals such as Fiat and Volkswagen in markets such as South America, and Renault-Nissan in tapping growth in southeast Asian markets.

Carmakers have increasingly turned to alliances and joint ventures to increase their scale and cost efficiencies, but a deal between Peugeot and General Motors to share some products and suppliers has failed to live up to the French carmaker’s hopes.

There are expected to be 5.5m cars and light vehicles sold in southeast Asia this year, roughly half the size of western Europe. But the region’s market is expected to grow by more than half by the end of the decade, versus flat or marginal growth in Europe.

Negotiations are continuing between Dongfeng and Peugeot about exactly how much the Chinese group will pay for what percentage of Peugeot.

The people briefed on the discussions, who declined to be named as the talks were private, added that it could still all fall apart, although this was looking less and less likely.

The French state is contemplating matching any investment made by the Chinese group to maintain French influence over the company.

The most likely investment by Dongfeng and the French state would give the Chinese carmaker and Paris 17.6 per cent each, according to research by Macquarie, with the Peugeot family holding 16.5 per cent and GM 4.5 per cent.

An injection of that size would result in the Peugeot family losing control of the business it founded in 1882.

Based in Wuhan, in central China, Dongfeng is one of China’s largest car manufacturers with annual revenues of $63bn. It already operates a manufacturing joint venture with Peugeot alongside three others – HondaKia and Nissan – and last week signed a fifth joint venture agreement with Peugeot’s French rival Renault.

If completed and approved by Beijing, Dongfeng’s tie-up with Peugeot could catapult it on to the global stage – something that no Chinese state-owned carmaker has yet been able to achieve. Hangzhou-based Geely, which purchased Volvo Cars from Ford in 2010, is privately owned.

“Whatever they pay for the shareholding, they’re probably going to get justification in knowhow,” said Bill Russo, a Beijing-based automotive consultant. “Peugeot’s global distribution capacity would also be an advantage for Dongfeng.”

Peugeot accounts for 60 per cent of France’s car production and employs close to 100,000 people locally.

Additional reporting by Tom Mitchell in Beijing


GM to shift overseas operations from Shanghai to Singapore

The Financial Times, November 13, 2013

By Jeremy Grant in Singapore

General Motors will shift the bulk of its non-Chinese international operations from Shanghai to Singapore in 2014, marking a coup for the Asian city-state as it lures an increasing number of multinational companies with tax breaks and other incentives.

The Detroit-based carmaker said it would locate 120 staff in Singapore to oversee markets in the Association of Southeast Asian Nations (Asean), Africa, India, South Korea and the Middle East, as well as the European operations of Chevrolet – its best-selling brand – and Cadillac, its luxury marque.

The shift is the latest success in Singapore’s efforts to encourage multinational companies to establish regional headquarters, as it takes advantage of companies’ desire to tap into the region’s rapidly growing markets.

It also marks GM’s return to Singapore after a decade. The company moved its Asia-Pacific headquarters from Singapore – where it had been since 1993 – to Shanghai in 2004.

That coincided with the rapid emergence of China’s car market, where GM around that time started selling more units of its Buick brand than in the US.
By making the decision to shift its “consolidated international operations” (CIO) to Singapore, GM is in effect carving out a separate unit from its now much larger businesses in China and South Korea.

GM said decisions about its CIO markets would now be made “in the interest of growing our business while allowing us to focus even more intently on China”.
The company plans to retain 250 staff in Shanghai to oversee China, while 245 staff will remain in Seoul.

GM’s light vehicle sales in China have risen by an average annual rate of 27 per cent over the past five years, from 1.1m units in 2008 to almost 3m in 2012, making the country its largest market.

Its operations there include four manufacturing joint ventures, an research and development centre and four sales and service operations. “GM has achieved a very deep level of localisation in China,” said Bill Russo, a Beijing-based automotive consultant.

Stefan Jacoby, vice-president at the CIO unit, said of the shift to Singapore: “It will help us to create a renewed identity . . . and lead GM’s umbrella strategy for the region. We are looking forward to being an important part of the Singapore business community.”

The 10-nation Asean bloc, of which Singapore is a member, is home to a population of about 600m and has a combined gross domestic product just behind those of China and Japan.

Singapore ranks among one of the most business-friendly cities in the world, offering a corporate tax rate of 17 per cent, political stability, a UK-based legal system and sophisticated financial services.

Consumer goods companies, whose revenues are increasingly coming from emerging markets in Asia such as Indonesia and Vietnam, have also been expanding in Singapore.

McDonald’s, the US fast food company, recently upgraded its regional hub there as the operational base for Asia, the Middle East and Africa.

Procter & Gamble runs its global Pampers nappies business from Singapore, and is poised to open a research and development centre in March that will be the largest commercially run such facility in Singapore.

Rival Unilever, maker of Dove soap and Lipton tea, operates a global operations hub out of the city-state, where it bases its group chief operating officer.

Similarly, suppliers are also expanding in Singapore. In June, Givaudan broke ground for a new fragrance manufacturing facility and “perfumery school” in Singapore to develop scents and flavours that cater to Asian preferences.

However, some foreign companies are having increasing difficulty hiring workers with certain skills after the Singapore government this year tightened up on the influx of foreign workers.

Additional reporting by Tom Mitchell in Beijing


Bill Russo Named Vice President, Corporate Development for HARMAN’s North East Asia & China Operations

Press Release

03 December 2013 – FOR IMMEDIATE RELEASE

STAMFORD, ConnecticutHARMAN International Industries, Incorporated (NYSE:HAR), the premium global audio and infotainment group, today announced that Bill Russo has joined the company as Vice President of Corporate Development for Harman’s North East Asia & China operations, with primary reporting to David Jin, Chairman & President of Harman North East Asia & China.  Mr. Russo also reports to Sandra Rowland, Vice President, Corporate Development and Investor Relations for Harman International.  He has responsibility for new business development, regional growth initiatives, strategy deployment and related communications.

Bill comes to Harman with more than 25 years of automotive industry experience, including 10 years in China.  His deep knowledge of the automotive sector and extensive networks will help accelerate Harman’s plans to grow our share of the automotive markets, including infotainment, branded audio and integration services,” said Jin.   We are confident Bill will help strengthen our relationships in the region and make significant contributions to our business.” 

Mr. Russo most recently was President and CEO of Synergistics Limited, an Asia-based business development advisory firm.  From 2004 to 2008, he served as Vice President of Chrysler Group’s North East Asia business, where he directed operations for the regional markets.  While at Chrysler, he served in roles of increasing responsibility, including oversight of Product and Business Strategy.  Earlier in his career, he worked in the global services and technology divisions for IBM Corporation. 

Mr. Russo has published numerous articles and is a frequently quoted expert in the major financial media on developments occurring in the global automotive industry.  He regularly speaks at major automotive industry conferences and events.

Mr. Russo holds a Master of Science degree in Manufacturing Systems Engineering from Lehigh University and a Bachelor of Science degree in Chemical Engineering from Columbia University.

Mr. Russo will be based at Harman’s North East Asia headquarters in Shanghai, China. 


HARMAN (www.HARMAN.com) designs, manufactures, and markets a wide range of infotainment and audio solutions for the automotive, consumer, and professional markets. It is a recognized world leader across its customer segments with premium brands including AKG®, Harman Kardon®, Infinity®, JBL®, Lexicon®, and Mark Levinson® and leading-edge connectivity, safety and audio technologies. The company is admired by audiophiles across multiple generations and supports leading professional entertainers and the venues where they perform. More than 25 million automobiles on the road today are equipped with HARMAN audio and infotainment systems. HARMAN has a workforce of about 14,000 people across the Americas, Europe, and Asia and reported sales of $4.3 billion for the fiscal year ended June 30, 2013.