Competing in the China Truck Market - Leveraging China for the World

by Bill Russo

This is the sixth and final installment in a series on the China Commercial Vehicles market.  

Click here to read the first installment.

Click here to read the second installment.

Click here to read the third installment.

Click here to read the fourth installment.

Click here to read the fifth installment.

We are in the midst of an economic revolution: a shift of the global center of gravity of economic strength towards the east, which is fundamentally reshaping the competitive landscape of numerous industries.  As an economic bellwether, the automotive industry is of great importance to this rebalancing of economic power.   The changes that result from the restructuring underway in the automotive sector are fundamental and irreversible.

After an unprecedented period of economic expansion, the Chinese government began taking measures to shift the economy to a more stable and sustainable pattern going forward.  China is likely to manage the risks associated with this transition with little disruption to the world, the environment, and the fabric of its own society.

By 2020, we anticipate that the commercial HD/MD trucks install base will increase by almost 7 million units to 10.7 million and annual sales will rise to 1.7 million – representing 43% of the global truck market.  With anticipated growth in export sales of Chinese-assembled trucks, it is easy to see how the Chinese market will be the most important market in the world.

It is becoming increasingly urgent for global truck manufacturers to get in the game in China.   The local players will increasingly influence regulatory policies and standards, making it more difficult to enter and compete in the market in the future.   The delay of Euro 4 gives local MDV/HDV manufactures more time to develop their technology, as they retain their enormous cost-advantage compared to European and Japanese high-end OEMs.

While it is legitimate to question whether Chinese companies can assume a leadership role in the transformation of the global commercial truck industry, one simply cannot deny the influence that China has had on industry developments.  The sheer size and growth of the China market will require multinationals to consider reprioritization of their capital plans and resource allocation.   The reallocation of production and supply resources to China has fundamentally changed the cost structure of many industries – which changes the entire competitive pricing game.  China’s government policies and centrally planned economy have supported the creation of the infrastructure needed to stimulate both the supply and demand side of the auto business.

Already, low-cost “good-enough” quality Chinese companies are about to change the global competitive landscape with products that are relevant to the high-growth global emerging markets.  As China automotive players begin to consolidate, they will increase their efficiency, scale and R&D capabilities – making them even more competitive in the future.

Global manufacturers will increasingly be pushed into the luxury “niche”, unless they adjust their business model and develop low-price, as opposed to low-cost products, which are not just “good enough”, but have the right features, durability, more rapid innovation, and lower price to be sold globally.  The Chinese market is already highly fragmented, and the pathway to entry for foreign players is not obvious.  However, we believe that several market entry options exist as previously noted.  MAN’s JV with Sinotruk may be able to crack open the mid-range market in which local OEMs are dominant.

A catalyst is defined as “a person or thing that precipitates an event”.  This is an appropriate characterization of China’s role in the transformation of the global auto industry.  In a globalized world, we will likely find that the transformation of the automotive business model may not be linked to any one company or country.  Instead, leading 21^st century companies will be the ones that can quickly adapt to the reality of globalization.

The emergence of China as the largest automobile market in the world is a significant event only in the sense that it causes the entire world to take notice of just how fast this economy is developing – and to also understand precisely how China is transforming the global auto industry.  Rather than trying in vain to turn the clock back to the way things used to be, it would be wise to learn how to use these transformational forces to define a business model to leverage the capabilities which globalization makes possible.