Competing in the China Truck Market - The Competitive Landscape

January 7, 2013

by Bill Russo

This is the second installment in a series on the China Commercial Vehicles market.  Click here to read the first installment.

Unlike the passenger vehicles market, domestic brand manufacturers dominate the commercial truck sector in China.  Historically, the top China truck manufacturers started their MDT & HDT development from older generation platforms, which originated from the former Soviet Union and Austria (Steyr).  The availability of low cost platforms, and very low freight rates (which have remained firm for the past two decades), has created a hidden cost barrier for major international players.  

Full-year sales in 2010 indicates that a 90% market share of MDT/HDT was taken by 10 Chinese OEMs, with First Auto Works (FAW), Dongfeng Motors (DFM) and China National Heavy Duty Truck Corp (CNHTC) in the top 3 positions for HDT.  Together they have a combined market share of 58% of the MDT/HDT market.

However, each OEM has distinctive positioning and advantages in the HDT segment.

• FAW and DFM enjoy the best brand image and have a deep commercial vehicle experience, along with a well-developed dealer and service network.  However, both suffer from weak corporate governance and a lack of employee performance incentives.  Both companies have developed their HDT product line-up through upgrades from their MDT platforms, and they positioned themselves as volume leaders in the medium- to low-priced HDT segment.
• CNHTC is considered the best competitor in the construction sector.  They develop their own parts and will benefit from the JV with MAN in the area of product and component development, procurement and sales.  CNHTC is weak in their portfolio of long-haul vehicles.  Their company operation is considered very bureaucratic and they have a poorly-developed dealer and service network.
• BAIC Foton is behind the top 3 in sales, and should considerably benefit from the JV with Daimler to develop engines.  Despite their smaller scale, Foton has more efficient product development, stronger marketing and a better dealer network.
• Shaanqi has comparable sales to BAIC Foton, and is well recognized in the vocational HDT sector.  Historically, Shaanqi benefited from previous cooperation with MAN and their technology assistance. However, such advantage is being eroded when MAN forms its alliance with CNHTC.  Shaanqi is also fighting with their parent company (Weichai) on operational control.
• Among the smaller truck makers, JAC and Beiben are most likely to close the gap with Shaanqi, since they can leverage the advanced technology supply from their international partners respectively.  JAC has been discussing potential partnerships with Navistar and Caterpillar, while Beiben is cooperating with Hyundai.
• The rest and other new entrants, such as SAIC, CAMC and Nanjun, have a much narrower range and face several technical and financial constraints to expand their market share.

China MDT/HDT manufacturers benefit from low labor and raw material costs, which enable them to sell their Vehicles at 25 – 33% of the price of international products.  Prices for trucks produced by multinationals can range as high as USD $350,000 (MAN), whereas the highest priced product in China sells for 72% less at USD $100,000 (FAW). 

However, Chinese truck makers are increasingly confronted with a different set of challenges: 

On the demand side, the government and commercial fleet demand is slowing down, and buyers are increasingly concerned with fuel economy and durability.  Further complicating the landscape is the fact that more stringent regulations regarding safety and environmental standards are being implemented – driving cost structure higher. 

On the supply side, the technology and feature gap among local manufacturers is narrowing.  It is becoming increasingly difficult to charge any price premium on new vehicles as the market has become hyper-competitive and less differentiated. Those challenges are pushing local brands to alter their thinking regarding the need for development and technology support from international partners.

With the gates to China’s commercial truck market potentially beginning to open, leading HDT manufacturers have begun to explore joint ventures and alliances in China with top-tier manufacturers.  Various joint venture and equity shareholding relationships were established since the SAIC Iveco successfully formed its JV with Chongqing Hongyan in 2006.

The cooperation between MAN/CNHTC offers perhaps the most promising cooperation, as the interests of both parties are apparently well aligned.  The strategy includes formation of an R&D center and involves a global strategy including direct exports to the EU.  

The Daimler/BAIC-Foton JV entails a strong technology component and a solid market component.  The Iveco/SAIC cooperation has been in place for several years and provides a limited rage of products for the domestic market. Navistar/JAC have more recently discussed a potential cooperation for the China domestic market, and Volvo Truck is in active talks with Dongfeng Motor to form a HDT joint venture after ending their cooperation with CNHTC.  This JV is expected to be majority (55%) controlled by Dongfeng, and may involve building a locally-branded HDT based off a European standard cab and chassis supplied by Volvo.

Expanded cooperation between domestic manufacturers and international players will reshape the landscape of China’s HDT market.  The market can be broken down into three price segments: Low-end (less than 200,000 RMB, e.g. 32,000 USD), Mid-market (200,000-350,000 RMB, e.g. 32,000-55,000 USD) and High-end/imported segment (above 350,000 RMB). Among which, the mid-market segment is more than 70%, and being continually enlarged by virtue of the continuous upgrading of locally built trucks.

The mid-market HDT segment is different from the low-end product segment, not only by pricing, but also by vehicle capacity and sophistication of technologies.  Mid-market HDT is characterized as higher gross weight (18 tons and above), higher power output (range from 230HP-420HP), and more advanced safety and fuel economy technologies. 

Two paths are followed by Chinese truck manufacturers for obtaining such technologies.  Independent development on the inherited vehicle platform is one approach.  The Jiefang brand J6 developed by FAW is one good example.  However, J6 was a cost- and time-intensive project for FAW, which spent a total of seven years and invested more than USD $100 million .  As an alternative, China local manufacturers are choosing to collaborate with international partners to locally adapt their existing global platforms to the Chinese market requirements.  Starting with the initial cooperation between MAN and Shannaqi on the F2000 platform in 2004, other collaborative partnerships have followed.  Dongfeng worked with Nissan Diesel on development of the Tianlong series, CNHTC developed its Howo A7 based off the F10 cab from Volvo, and BAIC Foton is planning to use a Mercedes-Benz diesel engine to power their Auman trucks.

These locally adapted international technologies are widely welcomed by Chinese customers as “best value” products since they outperform low-end trucks while retaining a huge price advantage over the high-end/imported trucks.  Obviously strong demand for mid-market products is motivating Chinese truck manufacturers to turn to international partners for technology and shared investment.

With the market slow-down since 2011, many truck manufacturers are becoming concerned that they may have been overly aggressive regarding their growth prospects.  Overcapacity in China will be an issue for the years to come.  The forecasted demand for HDT in 2015 stands at 1.5 million units, whereas capacity will likely exceed 2 million units. Existing OEMs have ambitious expansion plans, and new entrants are also considering expanding their business into the HD truck market.  To overcome the overcapacity problem, leading Chinese truck manufacturers are considering aggressive export strategies, particularly to Africa, South America and South East Asia and other countries with low emission standards, low tariffs and weak domestic truck competition. 

What gives Chinese OEMs the confidence to expand the truck export business is their low-price, “good enough” quality Chinese supply base.  Competitive parts sourcing cost in China has the potential to change the global competitive landscape for commercial vehicles[1].  Already today, China accounts for 50% of the global MDT/HDT market, with localized suppliers. 

In summary, the China MDT/HDT market is almost fully dominated by domestic truck manufacturers led by FAW, DFM and CNHTC.  The competitive landscape will be altered when Chinese OEMs pursue partnerships designed to upgrade their capabilities to address growing market needs for better value HDT products.

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[1] China with its unique business environment (enormous size, fiercely competitive companies, low labor costs, and explosive growth in infrastructure and public service), gives this new global mid-market players an enormous platform to grow and to improve their quality and reliability, largely protected from foreign competitors, who find it hard to penetrate this segment and focus on the high-end market. In addition the new innovators will be fully attuned to the Chinese needs, particularly in the B2B area, which will make them very competitive in other emerging markets.

This is the second installment in a series on the China Commercial Vehicles market.  Click here to read the third installment.