How China Brands Took Over the World’s Hottest SUV Marke

Bloomberg Business, April 17, 2015

BYD Co.'s Sport-Utility Vehicles

BYD Co. S6 sport-utility vehicles (SUV) move along the production line at the company's assembly plant in the Pingshan district of Shenzhen, China. Photographer: Brent Lewin/Bloomberg

After years of losing out to foreign brands, China’s automakers are winning in the world’s hottest SUV market by employing a tried-and-tested strategy: offering them cheap. 

By flooding the market with comparable models at lower prices, Chinese automakers accounted for eight of the 10 bestselling sport utility vehicles in the first quarter, crowding out global nameplates like Toyota Motor Corp.’s RAV4 and Honda Motor Co.’s CR-V. 

Chinese-branded SUV sales more than doubled in the first quarter to overtake foreign nameplates in the segment this year, accounting for 56 percent of all deliveries, according to data from the China Association of Automobile Manufacturers. At the Shanghai auto show next week, Honda will unveil a full-sized SUV concept that will compete for attention with local offerings like BYD Co.’s new Song and Yuan SUVs. 

“A significant number of Chinese consumers are looking for a more affordable alternative to premium-priced foreign SUVs,” said Bill Russo, a Shanghai-based managing director at consultant Gao Feng Advisory. “Foreign automakers now need to price more aggressively as the market matures and becomes more hyper-competitive.” 

Almost half of the new and refreshed passenger vehicles slated for debut this year in China are SUVs, with about three-quarters of them from local automakers, according to estimates by Bloomberg Intelligence.

Cheaper SUVs

Global automakers are competing against names little known outside China: Anhui Jianghuai Automobile Co.’s Ruifeng S3, BAIC Motor Corp.’s Huansu and Chongqing Changan Automobile Co.’s CS35 all rank in the top 10 by sales. Great Wall Motor Co.’s H6, the most popular SUV in China, costs about half the price of Volkswagen AG’s Tiguan. 

The average price of the bestselling Chinese SUVs in the first quarter was was 82,900 yuan ($13,380), versus 167,300 yuan for the foreign makes, according to dealership quotations compiled by Autohome, a car-pricing website. 

The addition of new models is being accompanied by a surge in production. Annual output of SUVs in China is estimated to reach more than 7.04 million units in 2018, up from 4.32 million last year, according to researcher IHS Automotive.

Rare Win

The SUV success represents a rare win for China’s automakers, which have struggled despite heavy government intervention. Foreign companies are required to set up joint ventures with local carmakers to operate in the country, sharing profits and technology. 

Utility vehicle sales accounted for 24 percent of the total passenger-vehicle market in the first quarter. Local carmakers have been fast to catch the shift in consumer preference from traditional sedans to more spacious crossovers, and fill the gap in the market for lower-priced alternatives. 

“It’s about time Chinese automakers gained back some territory after losing out to foreign brands for so many years,” said Cao He, a Beijing-based analyst at China Minzu Securities Co. “But they have to watch their backs and make sure the growth is sustainable and they don’t put all their eggs in one basket.”

Executive Shows China’s First Home-Grown Electric Sports Car

The Wall Street Journal, April 22, 2015

A Chinese company’s new electric sports car is aimed at the luxury end of the market, currently dominated by European brands. The WSJ's Colum Murphy reports.

  

By Colum Murphy

April 22, 2015 5:54 p.m. ET

CH-Auto's electric sports car, the Event!, is seen at Shanghai Auto 2015, China's annual auto show, in Shanghai on April 20, 2015. Photo: Miguel Gonzalez Jr./The Wall Street Journal

BEIJING—In a quiet technology park near the Chinese capital’s airport, a former Beijing Jeep executive is completing a plan to create China’s first homegrown electric sports car.  

Lu Qun’s idea: design and build a battery-powered sports car that is cheaper than imported European gasoline-engine roadsters. If successful, Mr. Lu’s first car would go into production in late 2016 and challenge similar models from much bigger foreign companies.  

His CH-Auto Technology Co. has a track record. It has designed gasoline-powered cars for Chinese manufacturers including Zhejiang Geely Holding Group, Jiangling Motors Corp. and a Dongfeng Motor Group. joint venture.  

British auto maker Aston Martin Lagonda Ltd. also has plans for an electric sports car that it will sell in China and everyone from Tesla Motors Inc. to Toyota Motor Corp. have big plans to expand electric-car sales here. Aston Martin Chief Executive Andy Palmer said he was aware of at least two other companies in addition to CH-Auto looking into similar electric-car projects. 

Electric cars are enticing because the Chinese government has pledged substantial support for their development to address air pollution produced by conventional-engine vehicles. China also hopes adoption of electric cars will bolster energy security by reducing dependency on imported gasoline. 

Sales of electric vehicles in China rose to 18,000 units last year, quadruple the number in 2013, according to the China Association of Automobile Manufacturers.
But success for electric-car makers in China—including Tesla—remains elusive. Shenzhen-based BYD Co. , backed by renowned investor Warren Buffett, has struggled for years to gain traction. Last year BYD sold around 21,000 pure electric and plug-in hybrid vehicles, according to the company. Tesla sold 32,733 vehicles globally last year. It doesn’t disclose sales figures for China, but for the year, Asia as a whole supplied 15% of Tesla’s sales. 

Challenges include the high price of most electric vehicles, as well as difficulty in developing infrastructure such as charging stations for a nation as vast as China.
Mr. Lu says the solution is to give customers a reason to buy an electric vehicle, which is where sports cars—already high-ticket items popular with wealthy Chinese—come in. Mr. Lu plans to first target the high end of the market with Event, the name of the company’s first battery-powered sports car. Once the brand, with its dragonfly logo, is established, CH-Auto would follow with cheaper electric cars made in greater volumes.

This week, CH-Auto displayed three cars, including a high-tech two-seater that it said runs on a 48-kilowatt-hour battery and can go from zero to 100 kilometers an hour in 4.6 seconds. It claims a range of 250 kilometers (155 miles) and can be recharged in six hours using a standard 220-volt power supply. 

The company didn’t reveal the price, saying only that it will be significantly cheaper than imported sports cars. 

Industry analysts expect the Event to be priced around 700,000 yuan, or about $115,000. A Maserati Gran Turismo sports car, by comparison, costs 1.95 million yuan in China. 

Industry watchers say the odds for success are still long, especially for lesser known companies like CH-Auto, which face costly investment in manufacturing facilities and difficulties in creating a brand. 

“I don’t think it’s crazy, but the road ahead is fraught with potential pitfalls,” Mr. Palmer said of his potential competitors, which don’t have Aston Martin’s100-plus-year track record. 

CH-Auto said it recognizes the challenges but is confident its vision is sound and it can adequately address any obstacles that may arise.

‘Can they do what Tesla does? That is a bit of a stretch.’

—Bill Russo, managing director at Gao Feng Advisory

Mr. Lu has selected Suzhou, in eastern China, for CH-Auto’s production base, and hopes to begin building a factory there this year. The company declined to say how much it is investing.  

Eventually, CH-Auto hopes to produce as many as half a million vehicles a year, if it is successful in expanding into mass-market passenger cars, he said.
To finance production of its first vehicle, the company this summer plans to sell shares in the company on Beijing’s over-the-counter stock exchange that is designed for growth enterprises. 

Mr. Lu said CH-Auto plans to go it alone, but he didn’t rule out partnerships with other companies. 

Mr. Lu, who was chief production engineer of the Jeep Cherokee in China until 2003, says his dream is for the Event to become as famous as Chinese smartphone maker Xiaomi, online retailer Alibaba and drone maker DJI, and help China graduate from low-cost car-making to true automotive innovation.

That is a tall order. China’s giant Internet and technology brands have succeeded by the business-model innovations brought to consumers, said Bill Russo, managing director of consulting firm Gao Feng Advisory.

But Mr. Russo said CH-Auto takes a different approach than China’s internet companies. “Their approach is innovation driven by product and technology. It’s not business-model innovation,” he said. “They probably can make a cool sports car and sell a few hundred, or even a few thousand. But can they do what Tesla does? That is a bit of a stretch” for a small, little-known company like CH-Auto, said Mr. Russo. 

“When a technology is disruptive, newcomers have an edge on existing players,” said Oded Shenkar of the Fisher College of Business at Ohio State University. In addition, he said, the Chinese government is eager to nurture national electric car champions by offering assistance ranging from tax breaks to export rebates and preferential status for government procurements. 

But for CH-Auto to benefit from such support, it will have to show first that it is viable as there are multiple contenders for such assistance, Mr. Shenkar added.
—Rose Yu and Lilian Lin contributed to this article. 

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

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

Competing in the China Truck Market from Gao Feng Advisory Company

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.  

Making it big: large cars and government procurement

China Automotive Review, October, 2013

Extracted quotes from Bill Russo:

“When China regulates it does so in regard to the stage of its industry and with a certain set of outcomes in mind,” says Bill Russo, president and CEO of Synergistics Ltd., a Beijing-based automotive consultancy.  Both FAW (Hongqi) and SAIC (Roewe) have a history of providing government cars. Hongqi dates back to 1958 and was used for high ranking government officials until they switched to favouring foreign cars. SAIC built the Phoenix and later the Shanghai SH760 for officials not important enough for a Hongqi.

It is also going to be difficult to persuade officials to drive domestic cars if they are perceived to be inferior. “The existing government fleet can hardly be downgraded,” says Russo.

Sales of these large cars so far have not lived up to expectation. Last year the Roewe 950 sold 4,905 compared to 86,101 for the Buick LaCrosse, on which it is based. “It isn’t about just having a product that meets the specifications but the esteem this class of buyer aspires to have,” says Russo.

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

"Competing in the China Truck Market" rated Most Popular Article in CHINAtalk

CHINAtalk, October, 2013 edition

The following recognition was received for Bill Russo's series of articles on the China truck market in the recent edition of GlobalAutoIndustry.com's CHINAtalk newsletter:

MOST POPULAR ARTICLES FROM SEPTEMBER EDITION

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

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 ...  Read on...

1st installment:   An Introduction 2nd installment:  The Competitive Landscape 3rd installment:   Policy and Regulatory Outlook 4th installment:   Implications for Multi-National Corporations 5th installment:   Winning in China's Mid-Market Click here to read the article in the September edition of CHINAtalk

Chinese Vehicle Market Slow to Turn Green

Wards Auto, April 19, 2013

by David Green

Chinese policy makers appear to be favoring hybrid vehicles with subsidies.

BEIJING – With the dust now settled from last month’s handover of power in Beijing, policymakers responsible for China’s auto sector seem to be favoring hybrids as a step toward expanding green-vehicle use.

The initial stage of the push to promote so-called new-energy vehicles, and with them a differentiated technology standard that China can export, now is widely acknowledged to have failed, at least regarding promoting sales of battery-electric vehicles.

Axel Krieger, analyst at management consultancy McKinsey’s office in Beijing, tells WardsAuto: “The frustration is that the policy is unclear, there are hardly any EVs to buy, the infrastructure is not there and there are disparate local solutions for local OEMs.”

Data from the China Association of Automobile Manufacturers (CAAM) shows only 12,791 new-energy vehicles were sold in China last year, the vast majority to government projects.

A little more than half were passenger vehicles (public buses accounting for most of the remainder), and these were spread across a range of domestic suppliers, with Chery’s QQ3 electric vehicle the top performer with 3,129 deliveries.

Industry sales primarily were EVs, but including a handful of hybrid-electric, plug-in hybrid-electric, solar, fuel cell, natural-gas hybrid and liquefied-petroleum-gas-fueled vehicles.

This is far from the government’s interim target of having 500,000 green vehicles on the roads by the end of 2015, let alone its projection for 5 million by 2020.

These frustrations were voiced by Beijing Automotive Group Chairman Xu Heyi, who told a press conference in mid-March that government sales accounted for almost all his state-owned company’s 2012 sales of 1,000 alternatively powered vehicles.

This is because of an underdeveloped recharging infrastructure: Beijing has just 47 EV charging stations, compared with 67 in Geely’s headquarters city of Hangzhou.

And while Industry Minister Miao Wei last month affirmed the government’s intention to continue encouraging green-vehicle sales though consumer and producer financial support for another three years, more flexibility is planned, including more subsidies for hybrids.

Notably, a new tier system will base subsidies not on vehicle type but on its energy-saving potential. One plan stipulates offering RMB3,000 ($483) per kilowatt-hour capacity of an auto battery, which can cover hybrids as well as EVs.

A 3-year trial program that expired in December provided a subsidy of RMB60,000 ($9,500) for the purchase of EVs and RMB50,000 ($8,060) for plug-in hybrids. Hybrid electrics were eligible to receive just RMB3,000, but the new subsidy framework removes the restrictive focus on EVs, to which the domestic industry so far has failed to respond.

“A shift is now taking place whereby the government is moving towards encouraging hybrid vehicles as a stepping stone to increasing the number of cleaner vehicles,” IHS Automotive analyst Namrita Chow says.

Industry-watchers say the central government’s promotion of hybrids could favor foreign auto makers and joint ventures, given their superior quality, reliability and warranty protection.

“I think global players like Toyota will benefit the most,” says Boni Sa, IHS Automotive’s China light-vehicle production manager. “Even if the government subsidizes hybrid vehicles in China, the hybrid cars will still be more expensive than the conventional models for both global and domestic” brands.

The FAW-Toyota JV is developing a hybrid version of the Corolla, Sales Manager Zhang Sijun says, and will increase investment in other hybrid models going forward. A BMW China spokesman confirms new-energy vehicles will be the focus of a forthcoming JV brand under the German auto maker’s existing arrangement with Brilliance Auto.

Another potential weakness in the revamped green-vehicle policy is the ability of local and city governments to have different policies, which might discourage the development of vehicles that are salable elsewhere in China or abroad.

Even as industry minister Miao was announcing the central government’s new subsidy program, officials in Tianjin, Shenzhen and Guangzhou were issuing details of their own, unrelated policies to stimulate local investment, prompting Yesheng Ji, deputy secretary-general of CAAM, to warn against such local protectionism.

“The pilot allows for multiple solutions to coexist. Different companies and local governments have different approaches – there’s no consistency,” says Bill Russo, a Booz & Co. senior advisor who cites BYD’s partnership with multinational ABB Group to develop charging infrastructure in Shenzhen as an example.

Wang Binggang, chief consultant to the Chinese government’s push to promote new-energy vehicles under the 11th Five-Year plan, wants the new subsidies extended throughout the green-vehicle chain, from auto makers to charging stations and upstream parts-replacement facilities.

Whether the new program adopts this kind of structured approach, even offering electricity tax concessions to users of EV charging stations, will go a long way toward determining its success, he says.

“The difficulty with reform in China is that the local regions can do a lot of stuff out of sight,” says Greg Anderson, principal at Pacific Rim Advisors. “They have been hammering on about auto industry consolidation, but that has not happened. There are new firms springing up all the time, because local governments are incentivized by economic growth.

“That’s how the (Chinese Communist) Party is built, and until those political and structural issues are taken care of, there is little chance of progress.”

Yet, Anderson also offers a note of cautious optimism. “(Premier) Li Keqiang is a trained economist – he gets this. There’s been a change at the top, there is the possibility of change, but we don’t know how effective it will be for years,” he tells WardsAuto.

Russo expects immediate progress in green-vehicle sales to public-transportation operators, including taxis. This could lead to more government vehicles going electric, although issues including public sanitation and postal service must be addressed before top officials abandon their premium black-tinted-window Audis.

Indeed, Anderson suggests: “People want to buy the most car they can that impresses their friends. It’s just not fashionable to drive a car that’s seen as environmentally friendly.”

Click here to read this article at WardsAuto.com

Competing in the China Truck Market - Implications for Multi-National Corporations

March 1, 2013


by Bill Russo

This is the fourth 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.

China’s market size has been hyped to the point of cliché since the country first opened its doors to foreign investment.  By 2020, the China HD/MD truck market is expected to reach 1.7 million units sold per year.  As noted in an earlier article in this series, products positioned in the in the price range between 200K – 350K RMB account for 70% of total sales.  The companies positioned to sell to this rapidly expanding “mid-market” segment aim to address the needs of domestic customers looking for goods and services that offer “good enough” quality and value for the money. 

Sandwiched between the premium market and the bottom of the pyramid, lies the rapidly expanding global middle market --  a segment of business and retail customers that is rapidly gaining buying power, especially in emerging markets.  The middle market offers more than incremental customers and profits – it is a key competitive battleground. The winners here will likely be the leading companies of tomorrow.

Beneath the veneer of many middle market strategies ostensibly focused on incremental growth, the emerging markets are incubators for a wave of local companies that are trying to climb up the product-price pyramid to eventually emerge as global competitors.

Whatever the motivation for pursuing mid-market strategies with an increasingly global scope, the elements of offense and defense have become equal in importance.  In the spirit of the Innovator’s Dilemma, written and popularized by Harvard’s Clayton M. Christenson[1], companies are adopting the mantra, ‘if I don’t do it to myself, someone else will do it to me.’  The dilemma of introducing fit-for-purpose, but lower priced products in the home markets of multi-national corporations has challenged the conventional business logic of pursuing projects with ever-higher return on investment.  However, succeeding in the rapidly expanding mid-market will certainly trump having an emerging-market competitor do it before you.

Mid-market form

The underlying reason for the emergence of mid-market players in China is the nature of the country’s economic growth. For many industries, China’s product market segmentation has become very diverse, typically far more than MNCs’ home countries.  In many countries, the market pyramid has a small top wedge, a modest middle slice and large base.  But in some others, the lower tier is smaller, the top is growing but still relatively small, and much of the expansion is coming in a bulging middle.  Whatever its size, this middle tier is the natural home base for many of the best Chinese companies. Here is where they find the opportunities best aligned with their strengths.

However, of most importance is that while winning in the mid-market will determine the fate of many companies within China, China’s mid-market impact will be felt far beyond the country’s borders, as some of the more prescient multinational companies have started to realize.  The Chinese companies emerging in this space will gain access to enormous scale advantages. Any profits they make will be reinvested, allowing them to move both up the value chain, and eventually out of the country to the international markets.

Breeding ground

The importance of China’s mid-market stems from the fact that this is where Chinese companies are establishing themselves. China’s domestic HD/MD manufacturers already command more than 90% share of the market for commercial trucks, and virtually all of the low-end market.  Having locked in this business, market leaders including CNHTC, FAW, DFM, BAIC and SAIC are in the process of acquiring capabilities that allow them to address the expanding mid-market.  Developing a highly adaptive and good-enough mid-market product offering is the pathway for such companies to win in China as well as expand beyond China.

They know they cannot enter at the top end of the market for most goods – in almost every industry; their products are not good enough to take on multinationals head-to-head.  They also know that while the bottom tier is perhaps their most natural home, such is the rate of China’s economic growth that this segment – however big it may be today – can only shrink, and at a rapid rate, over the next few years. Companies that want to grow must therefore address the middle tiers.

This is where their range of advantages can be brought to bear. Domestic businesses have – and will continue to have – privileged access to this tier. Not only will they be better positioned to offer strong value propositions, but they will also be better prepared to overcome the structural impediments that will prevent the rapid adoption of global business models in sectors such as construction and agriculture.

The size and diversity of China has created very complex market segmentation.  Regions are developing at different rates, with differing amounts of access to other markets both within the country and overseas. While this diversity will not last for ever, the transition stage the country has already entered will persist for many years to come – far longer than in other emerging markets, such as those of Japan, South Korea and Taiwan.  Here they will be able to temper themselves and build scale.

The major new companies that emerge from this breeding ground – some private, others state-owned – will be some of the most disruptive forces in Chinese business. Subject to intense competition from other mid-market firms, and selling to customers who themselves are constrained by competition, these businesses are both frugal and focused. From their mid-market bases, the best of them can build scale, add capabilities, and start to encroach on turf that multinationals have long regarded as their own.

For local players in the emerging markets, a mid-market strategy can be quite challenging, since local brands frequently incur greater pricing risk when delivering higher contented products into the market.  This is for a couple of reasons.  First, when the local product’s brand image does not naturally carry the price points required to support feature-rich products, these products are at risk of having to be discounted. Second, local companies are typically less accustomed to managing the complexity entailed in feature rich products, introducing the risks of cost-creep.  Overcoming such challenges is key to the development of the next generation of global competitors.

Many Multinationals assume that they just have to hold on until the Chinese market is mature enough to afford their products. But by that time these mid-market innovators will have built long-lasting relationships with their Chinese clients, and will have narrowed the gap between themselves and their global competitors.   Sany, who became the world-largest concrete pump manufacturer and who has recently acquired the second largest producer (Germany’s Putzmeister), is an example of this new breed of global players.

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[1] Clayton M. Christenson, The Innovator’s Dilemma (Harper Business: 1997)