Bill Russo to chair Automotive CEO Dialogue at J.P. Morgan Global China Summit

Beijing, China, June 3, 2015

Gao Feng’s Managing Director and Auto Practice leader Bill Russo will chair a panel discussion titled The Next Golden Age of China Auto Industry at 11:15am on Wednesday, June 3.

CEO Dialogue:  The Next Golden Age of China’s Automotive Industry

Hubertus Troska, Member of the Board of Management, Daimler AG; Chairman & CEO, Daimler Greater China
Karsten Engel, President and CEO, BMW Group China
Jochem Heizmann, Member of the Board of Management of Volkswagen AG, President & CEO Volkswagen Group China

Chair: Bill Russo, Managing Director, Gao Feng Advisory

J.P. Morgan Global China Summit 2015 Event Brochure from Gao Feng Advisory Company

China’s antitrust fines for foreign car companies fail to stall growth

The Financial Times, November 3, 2014

Trading up: premium vehicles cost almost twice as much as in the US

For multinational car companies operating in China, the euphoria from the biggest ever automotive boom in industrial history is finally being tempered by some unexpected risks, most notably a controversial investigation by the National Development and Reform Commission (NDRC) into allegedly anti-competitive behaviour by Audi, Mercedes-Benz and other brands.The investigations have so far resulted in fines that are peanuts in comparison to the vast profits that foreign automakers have enjoyed over recent years – and continue to enjoy.

In July, a joint venture between Volkswagen unit Audi and state-owned First Auto Works was ordered to pay $41m for alleged violations of China’s 2008 Anti-Monopoly Law. This compares with reported operating profits of $12.2bn for VW’s joint ventures in China (its other is with SAIC Motor) last year.

Fiat unit Chrysler was also hit with a small fine this summer, while Daimler’s joint venture with BAIC Motor, which makes Mercedes-Benz saloons, is still awaiting the outcome of an NDRC investigation after one of its Shanghai sales offices was raided in July.

These fines are the byproduct of a wide-ranging investigation that appears to have a much larger aim – forcing car companies, regardless of whether they are in fact guilty of anti-competitive practices, to lower the prices of their vehicles, spare parts and services.

According to one industry executive, the head of a multinational company’s China operations has told visiting board members that, in view of the NDRC’s offensive, his biggest fear is of a sudden shift in government policy. “It’s bad for business,” the executive says of the investigation. “It has made the investment environment very uncertain.

“If people can afford the cars, they can afford the spare parts and after-sales service,” he adds. “It’s not like the NDRC is lowering the price of medical care or making food cheaper.”

Foreign automobile executives argue that the relatively high prices asked for cars – especially premium vehicles that can be almost twice as expensive in China as they are in the US – is a function of unprecedented demand, even for overseas models subject to expensive import taxes.

China’s car craze began in earnest in 2008-09, during the depths of the global financial crisis, when it overtook the US as the world’s largest car market. 

Demand from entire generations of first-time drivers soared in the world’s second-largest economy, just as purchasing power collapsed in the US and Europe – a nadir symbolically marked by Washington’s bailout of General Motors in December 2008. 

Over the ensuing half decade, foreign carmakers in China, especially long established ones such as Volkswagen and GM, had a license to print money. 

Even last year, when double-digit annual growth was finally expected to taper, annual sales grew by about 15 per cent to 18m passenger cars – 10 times as many as were sold in India.

This year began in similar fashion, especially for foreign brands and their Chinese joint venture companies. Sales of Chinese brands, however, began to fall sharply and their share of the passenger car market tumbled from 27 per cent to 23 per cent.

The precipitous fall-off in sales of local brands and slower economic growth has forced the China Association of Automobile Manufacturers to lower its projection of an 8.3 per cent increase in year-on-year sales this year to 4.6 per cent – two-thirds down on last year.

In the first quarter, Geely, the private sector carmaker most famous for its purchase of Volvo Cars from Ford, saw sales of its own-brand vehicles fall by as much as 40 per cent over the same period a year earlier. 

This was despite a gradual improvement in the quality of local-brand cars in China, according to Geoff Broderick at JD Power, which publishes an annual customer survey of 212 models across 62 brands. “The domestic brands are doing exactly what they should be doing – focusing on quality,” Mr Broderick says. “But as we see the quality gap closing, we’re not seeing a pick-up in [local brands’] market share.”

Investigations have so far resulted in fines that are peanuts in comparison to the vast profits that foreign automakers continue to enjoy

One reason for the fall has been a counterintuitive NDRC requirement that foreign-invested joint ventures develop a local brand for the China market, such as the Baojun saloon manufactured by GM, SAIC and Wuling. Many of these new entrants are priced to compete against domestic rivals, especially in smaller cities where car ownership rates are relatively low.

“I don’t understand what the Chinese government’s objective was in encouraging foreign companies to create local brands,” says Bill Russo, a Shanghai-based industry consultant. 

“It only cannibalises already distressed sales of local brands. I think the intent was for more technology to be shared by the foreign companies. But the unintended consequence is to take volume from local carmakers producing similar products,” he adds.

At the other end of the spectrum, foreign carmakers continue to thrive in saturated markets such as Beijing and Shanghai, where premium brands such as Audi, BMW and Mercedes-Benz account for a quarter of the market. 

Even now, limits on expensive new licence plates to combat congestion and pollution are spurring their sales, as existing plate holders trade up.

“As cities implement plate restrictions, people gravitate towards premium foreign brands,” says Mr Russo. “They want to put their expensive plates on the best piece of automotive technology that they can.” 

Click here to read the article at FT.com

Jaguar Land Rover’s first China factory caps carmaker’s resurgence

The Financial Times, October 21, 2014

The opening of Jaguar Land Rover’s first China factory caps a five-year resurgence under Indian ownership that has made the Coventry-based company a byword for British manufacturing excellence and export prowess.

The new plant in Changshu, about a two-hour drive from Shanghai, marks a pivotal moment for JLR. The Tata Motors unit needs a manufacturing presence in China to consolidate its position in the world’s largest car market – but also wants to assure its British workforce and the UK government that international expansion will not jeopardise jobs at home.

As part of that effort, JLR is boosting investment at its factories in Liverpool and the West Midlands and this month opens a new £500m engine plant in Wolverhampton – even as it plans to open another manufacturing facility in Brazil. Last week, JLR’s factory in Halewood, Merseyside began producing the new Land Rover Discovery Sport after a £200m investment that created 250 new manufacturing jobs and £3.5bn in supplier contracts.

The Changshu factory, a Rmb10.8bn ($1.8bn) joint venture with state-owned Chery Automobile that opened on Tuesday, will produce JLR’s less expensive Range Rover Evoque for the China market, where the company sells almost five SUVs for every one Jaguar saloon. On Tuesday, JLR said that it also intended to produce a Jaguar saloon model at the factory by 2016.

“The demand that’s here in China will far outstrip [Changshu’s] capacity so we have absolutely zero plans to export any cars whatsoever,” Bob Grace, JLR’s China head, said at this year’s Beijing Auto Show.

Mr Grace hosted UK trade unionists in China at the outset of JLR’s investment programme in an effort to allay their fears. “You can imagine the thoughts that go through their mind when you open a factory in China,” he said.

“When you look at the competitive situation it doesn’t take long to realise that you have to build the cars in China as part of our global aspirations to be a fairly significant player.”
Roger Maddison, at UK union Unite, was one of JLR’s guests and says the union accepts the logic of the Changshu investment but has concerns about the longer-term trend it signals.

“Tata knows what differentiates JLR from other carmakers – it’s British,” says Pierluigi Bellini, analyst at IHS Automotive. “If they start developing cars in, say, India, it’s going to be a different brand image . . . Developing it from scratch – blank white paper to the final design – it’s important to keep that in the home market.”

Tata bought JLR from Ford in March 2008, a week after JPMorgan bought Bear Stearns. When Lehman Brothers went bankrupt six months later, the global financial crisis began in earnest and Ratan Tata, then chairman of the Indian group, had plenty of reasons to regret his purchase.

But the Indian provenance of JLR’s new owner hinted at the multinational nature of its future transformation, which would be built on surging demand in developing economies. The most important of these was China, whose emergence as the world’s largest car market coincided with the US government’s December 2008 bailout of General Motors.

“During the early part of 2009 we were pretty close to the wire as a business,” said Mr Grace. “But I used to come to China once a quarter and got a sense that something different was happening in this place . . . It’s almost a miracle that the [China] factory has come out of the ground in such a short period of time.” JLR’s joint venture with Chery was announced less than two years ago.

Bernstein Research predicts JLR will sell 130,000 vehicles in China this year, compared with 54,000 total units in 2009-2011. The Changshu factory’s initial annual production capacity is 130,000 vehicles but output is expected to ramp up gradually over the next few years.

“No other [carmaker] has benefited as much from China,” Max Warburton, senior analyst at Bernstein Research, wrote in a recent report. The country now accounts for a third of JLR’s total sales and, Mr Warburton estimates, more than half of its earnings before interest, tax and depreciation. In its latest quarter JLR posted pre-tax profit of £924m, on revenues of £5.35bn.

But the success has been driven by the Land Rover side of the company – in particular the Range Rover Evoque, a sporty 4x4. JLR sold more than 90,000 cars in China last year, but only 16,000 of these were Jaguars. The big three German brands – Audi, BMW and Mercedes-Benz – sold more than 1m. 

JLR joins the “big three” Germans as the fourth big premium carmaker to begin manufacturing operations in the world’s largest car market. Annual sales of premium vehicles, currently about 1.3m, are expected to reach 2.5m-3m units by 2020. But the Germans dominate the sector, with a combined market share of about 80 per cent. 

“There’s lots of opportunity for new premium entrants,” says Bill Russo, a Shanghai-based industry consultant. “The market is underserved. The German three alone can’t continue to maintain that kind of dominant market share. They can’t keep up with demand.”

JLR estimates that local manufacturing has allowed its German rivals to reduce prices by about 15 per cent on average, thanks to savings on import tariffs and other costs. The UK company, by contrast, has what Mr Warburton calls “the most egregious pricing in China”.

In response, Mr Grace says JLR has “worked quite closely with [Chinese regulators] in terms of reacting to the challenges they gave us [on pricing]. We more than met their requirements”. He adds: “We’re not setting the market price – we’re following the market price.”

JLR reduced prices on some Range Rover and Range Rover Sport models earlier this year in China, in response to a concerted campaign by the National Development and Reform Commission to drive down the pricing of vehicles and spare parts.

But the price differential between the same Land Rover models sold in China and other markets remains wide, with a top-end Range Rover selling for the equivalent of £85,400 in China and £44,000 in the US.

Click here to read the original article at FT.com 

Hunting for deals on wheels in China's developing used car market

Nikkei Asian Review, September 11, 2014

Used cars fill this lot near a residential area in Hefei, in China's Anhui Province. © Reuters

SHANGHAI -- Zhu Xiaohong closely examines a 4-year-old Volkswagen Touran, using the flashlight on his mobile phone. The gray VW sits in what looks like a multistory parking lot but is in fact the Shanghai Used Car Trade Market, the largest of a cluster of secondhand dealers on the city's Zhongshan North Road.

Zhu's conclusion: "I want to buy this car."

Zhu, who has bought used cars twice before, said he cannot afford to buy new. But while used cars are significantly cheaper than new ones in China, prices are higher than in developed overseas markets, and there is often greater uncertainty about quality.

Yasuhiro Konta, a senior manager responsible for secondhand sales at Dongfeng Nissan Passenger Vehicle, explained that it is rare to see a standard going rate for a used car in China. "Each price is decided by negotiation," he said.

This informal system reduces the pressure on sellers to keep prices down, according to Cameron Macqueen, general manager of Southern Cross Warranty, the Chinese arm of Australian financial company Presidian.

"Pricing in China is a lot higher than in the U.S. or Australia -- maybe up to 30% or more for some makes and models," Macqueen said. He estimated average secondhand sale prices at 60,000 yuan ($9,770) nationally, but added that the figure rises to 200,000 yuan in big cities such as Shanghai, where top-end luxury cars are popular.

Trust issues

China's used car market has expanded alongside a dramatic rise in demand for new cars. Sales of new passenger vehicles hit 17.92 million in 2013, according to Deloitte's 2014 China Auto Finance Report, confirming China's status as the world's largest car market.

Bill Russo, managing director of consultancy Gao Feng Advisory, said the supply of used cars is increasing as owners sell into the market rather than handing on vehicles to other family members. Demand, Russo said, is picking up as younger drivers become more comfortable buying preowned.

On the other hand, Russo pointed out that the ratio of secondhand sales to new car sales is much lower in China than overseas, suggesting that there is a lot of room for growth. In the U.S., three used cars are sold for every new car purchased, whereas in China only one used vehicle is sold for every four new ones.

While those numbers could change, the used car market faces considerable challenges. For a start, growth in new car sales appears to be slowing, although it is still high by Western standards. Deloitte, which tracks the industry closely, says it expects annual growth in China's new passenger car sales to fall from 15% in 2013 to 7% over the next few years, with the expansion of the used car market slowing from around 20% a year to 15%.

Used car sales are also hampered by a lack of transparent vehicle records, which often makes buying a matter of chance. Sometimes, sellers cross the line into outright fraud.

"I would say the majority of cars have their odometer wound back, and therefore credibility issues are rife," Macqueen said. "Chinese are not yet up to speed with how to look after their cars, so it is normal for a customer not to trust the history, the quality, of the car they're looking at, or the dealer."

Turning pro

The hit-and-miss nature of the used car market reflects the dominance of independent dealers and brokers.

Wang Meimei's corner of the Shanghai Used Car Trade Market is taken up by a BMW, a Mercedes-Benz and a Volkswagen Passat. "Sometimes I sell a car a day, sometimes a car a week. It varies," said Wang, who is preparing to retire after 10 years on Zhongshan North Road.

The market is changing, however. Alibaba Group, China's largest e-commerce company, recently announced plans to launch a platform for selling used cars online. Conventional dealers are also beginning to offer warranties on preowned vehicles, prodded by companies such as Southern Cross.

New car dealers, known in China as 4S shops, are increasingly moving into the secondhand business, bringing more professional marketing and sales techniques.

Martin Kuehl, a spokesman for Audi China, said the company expects the preowned market to continue to grow and has set up 290 licensed used car dealerships -- including 60 that sell only Audis. Dongfeng Nissan began selling used cars at some of its 4S shops five years ago; last year it sold around 20,000 through more than 60 dealers.

New government regulations that take effect in October are likely to accelerate the trend toward greater professionalism. Authorized dealerships will be free to sell a range of brands, rather than being tied to a single marque. Industry experts say this will give a further boost to the better-run 4S shops, whose more transparent pricing and marketing practices are likely to put pressure on independents to raise their standards.

Potential buyers check out vehicles at the Shanghai Used Car Trade Market. Preowned cars tend to be pricier in China than in other major countries. © Photo by Mark Andrews

     "I see a trend toward businesses who want to build a brand name -- meaning the quality dealers are getting more and more business," Macqueen said.

Some problems will remain, though. Many cities, including Beijing and Shanghai, have implemented measures to try to limit car numbers, usually by restricting the supply of license plates. Many of the cars on sale at Zhongshan North Road carry suburban "Hu C" plates, which do not allow the vehicles to be driven into the city center.

Emission standards also vary between cities and provinces, hampering the creation of a national market, or even of large regional markets.

When a new Ford Fiesta was introduced to China in 2009, models sold in Beijing and Shanghai were compliant with the fourth-generation national emission standard, equivalent to the European Union's Euro IV standard. Models destined for other parts of the country met only the older China III standard.

Today, registering a China III car is difficult nationwide. As a result, those Fiestas are hard to sell.

Click here to read the article at Nikkei Asian Review

China finds Mercedes-Benz guilty of price fixing

Reuters Newswires, August 18, 2014

Germany's Mercedes-Benz has been found guilty of manipulating prices for after-sales services in China, the official Xinhua news agency reported, adding to pressure on foreign carmakers in the world's largest auto market.

The report by the official Xinhua news agency made no mention of possible penalties, but China's 2008 anti-monopoly law allows the country's anti-trust regulator to impose fines of up to 10 percent of a company's China revenues for the previous year.

The Jiangsu Province Price Bureau, which launched an investigation last month, found evidence of anti-competitive practices after raiding Mercedes-Benz dealerships in the eastern coastal province and an office in neighboring Shanghai, Xinhua said.

The dealership in the same building as the Shanghai office which was raided appeared to be operating as normal on Monday (August 18), with potential customers peering at shiny new cars.

A Daimler spokesman repeated a statement, first made by Mercedes-Benz on August 5, that it was assisting the authorities with their investigation, adding that it was unable to comment further as it was still an on-going matter.

The Xinhua report said the cost of replacing all the spare parts in a Mercedes-Benz C-Class could be 12 times more than buying a new vehicle, citing a report from the China Automotive Maintenance and Repair Trade Association.

Managing director of Gao Feng advisory firm, Bill Russo, said the consumer would benefit.

"So I think what we are seeing is, first of all, a communication to the market that over the years, foreign branded products have been priced very high and informing the Chinese consumer that perhaps they should take another look at the prices and look for a more competitive price from the…and demand a more competitive price from the manufacturer. So in the end, this is actually a good thing for the consumer," he said.

An array of industries, from milk powder makers to electronics firms, have been coming under the spotlight in recent years as China intensifies its efforts to bring companies into compliance with the 2008 legislation.

The auto industry has been under particular scrutiny, with a wave of investigations prompting carmakers such as Mercedes-Benz, owned by Daimler, Volkswagen AG's Audi, and BMW to slash prices on spare parts in recent weeks.

"So by enforcing these laws, they are actually making the foreign branded products more affordable to the market, which in the end is going to make harder for Chinese branded car makers to compete against them. So the unintended consequence is that you're giving the consumers a better price but you are also forcing the local car makers to compete with foreign branded products that are more affordable," Russo added.

Early this month authorities said they would punish Audi and Fiat SpA's Chrysler for monopoly practices.

Chinese media reported last week that Audi, the best selling foreign premium car brand in China, would be fined around 250 million yuan ($40.7 million).

Click here to read the original article

Bill Russo to Chair Automotive Panel Discussion at 19th CLSA Forum in Beijing

Beijing, China, May 12, 2014

Venue:  Grand Hyatt Hotel, Beijing
Time:  11:30am

Panel Discussion Overview: China’s Automotive Market in Transition Following a decade of rapid growth that culminated in a stimulus-driven surge in demand in 2009-2010, the China auto market sharply decelerated, with growth slipping to 2.5% in 2011 and 4.3% in 2012.  This brief slowdown was followed by 14% growth in 2013, with overall sales exceeding 22 million units.  While the market growth has been spectacular, there are rising concerns on the sustainability of this performance as the market may be approaching a saturation point in the traditionally strong coastal regions.  Intense competition among automakers as they pursue emerging growth opportunities in specific regions and segments is anticipated.  The aim of this session is to discuss opportunities and challenges faced by different competitors as they deal with this a transitional period in the world’s largest automotive market. Opportunities and challenges in luxury and imported vehicles market Opportunities and challenges in emerging provinces and cities, as well as in second and third tier cities Sales and marketing strategies to exploit these opportunities Strategies to diversify profit streams and maximize profit opportunities Structural changes that may occur as the market transitions to a slower growth pattern Mr. Uwe Stadtler, CEO of BMW Automotive Finance (China) Co., Ltd. Mr. Manto Wong, CFO, Ford China Dr. Joerg Mull, China EVP and CFO, Volkswagen China Moderated by: Mr. Bill Russo Click here to for a description of the 19th CLSA China Forum

Global carmakers seek China inroads

The Financial Times, April 18, 2014

There will be no Easter holiday for many senior US and European auto executives as they abandon their families and battle jet lag at the largest car show in the world’s largest car market.

The Beijing International Automotive Exhibition, or Auto China 2014, opens on Sunday at a time when the importance of the fast-growing China market to the fortunes of multinational car companies has never been clearer.

In the first quarter of this year passenger vehicle sales in China rose 10.1 per cent to 4.9m units, including a monthly record of 1.85m units in January – a figure that exceeded the 1.8m passenger vehicles sold all of last year in India, Asia’s third-largest economy.

From mass market automakers such as GM to luxury manufacturers Daimler and Ford unit Lincoln, global success depends on success in China.

“Two, three years ago Beijing was an emerging show. Beijing is now on everyone’s calendar,” says Robert Parker, president of Lincoln China. “I told my wife I’d miss her birthday and my children that I’d miss their Easter egg hunt, but all of [Ford’s] executive and leadership team has done that.”

One executive who will not be in Beijing is Mary Barra, GM’s under fire chief executive. But far from the recall scandal that has erupted in GM’s home market, the US automaker expects to sell its one millionth vehicle in China this year during the show.

That puts GM on track to comfortably exceed the 3.2m passenger vehicles its joint ventures sold last year in China, GM’s biggest market accounting for about one-third of total sales. Analysts at Morgan Stanley estimate that joint-venture dividends and royalties from China contribute almost 60 per cent of GM’s free cash flow.

Lincoln will formally enter China’s luxury market, currently dominated by Audi, BMW and Mercedes-Benz, later this year. It is also unveiling a new car at the Beijing show – something it has never done before outside the US.

Bill Russo, founder of automotive consultancy Synergistics, predicts that popular “crossover” models – part sedan, part SUV – and technology features will garner much of the attention at Auto China 2014. “You can’t just come into the market with a car,” he says. “You have to show that you’re different from everyone else because the passenger car segment in China has become very crowded and hyper competitive.”

The competitive pressures are being felt most acutely by China’s largest domestic auto manufacturers, which some analysts feel are on the verge of a crisis.

At the end of last year, Chinese-brand passenger sedans commanded 27.5 per cent of the market, according to the China Association of Automobile Manufacturers, with German sedans in second with 24.3 per cent. Just three months later, German sedans lead with 27.1 per cent compared to 23.7 per cent for their Chinese rivals.

The collapse has triggered an intense debate among Chinese car companies and policy makers about whether shock therapy – in the form of a relaxation of the industry’s 50 per cent foreign ownership limit – is required.

Critics say the policy has encouraged passivity among large state-owned car companies, which enjoy a steady flow of profits from their joint ventures with foreign manufacturers while failing to develop own-brand vehicles that can compete domestically, let alone in Europe and the US.

China’s largest carmaker, SAIC Motor, sold just 230,000 of its own-brand cars last year, compared to the more than 4.7m units sold by its joint ventures with GM and Volkswagen. Sales for China’s “domestic big 5”, which in addition to well-regarded private-sector creations Great Wall Motor and Geely include BYD, Changan and Chery Automobile, are down 10 per cent this year.

“The dramatic decline in domestic [brand] sales so far this year has exceeded even our bearish expectations,” Bernstein Research analyst Max Warburton wrote in a recent note. Bernstein had projected the market share of Chinese brand cars would decline by 2.5 percentage points over the next two years but instead, their share fell 2.6 per cent percentage points in the first quarter of this year alone.

Click here to read this article at FT.com

Chinese manufacturers should behave like an American in Europe

China Automotive Review, November 2013

Extracted quote from Bill Russo:

The current perception of Chinese buyers is that Chinese manufacturers produce low cost and inferior cars compared to the joint ventures. Pursuing a multiple brand strategy is not going to change this especially when there is little difference in quality between the brands. “A multi-brand strategy requires a much higher cost structure to create and market a portfolio of uniquely branded offerings,” warns Bill Russo, president and CEO of Synergistics Ltd., a Beijing-based automotive consultancy. This money would ultimately be better spent on R&D to produce a smaller range of better quality vehicles that are not solely competitive on price and that have a definite design architecture. 

Full posting of this article is not allowed by the journal.