Ford Gets In The Fast Lane

CKGSB Knowledge, February 19, 2014

The high-decibel Shanghai launch of the all-New Ford Mustang

US automobile major Ford is stepping on the gas in China, the world’s largest auto market. Can it catch up with rivals General Motors and Volkswagen?

In December 2013, an enormous red dome appeared on the banks of the Huangpu river in Shanghai. Nearly 450 people converged under this dome, and watched spellbound as a 360-degree screen projected dazzling images. And with great fanfare, Ford Motor Co. launched the all-new Mustang.

Auto enthusiasts are used to high-decibel car launches such as this one. The glamor, glitz and festivity is now pretty much de rigueur.

Yet the Mustang launch was special for one reason. It signaled very clearly that China was now a key market for the Dearborn, Michigan-based automaker: the Shanghai launch event was one of the six global events occurring simultaneously in Sydney, New York, Los Angeles, Dearborn and Barcelona.

Ford has had China on its radar for a while now. As early as the 1910s the company exported its iconic Model T to China. It set up a presence here in 1995. In 2009, it even moved its Asia headquarters from Bangkok to Shanghai to increase its market penetration and capture a larger share of China’s auto pie. Ford makes for an interesting case study at this point for two reasons. One, it surpassed Toyota and Honda in sales to move up to the fifth rank in China. Two, Ford Focus has emerged as the top selling nameplate (as per IHS Automative sales data) in the passenger vehicle market in the country in 2013. Interestingly, while Ford registered a 35% gain in sales in December, GM, which had occupied the number one position so far, saw a slump of 6.3%.  (See chart below.)

The year 2010 marked a clear turning point in the history of the automobile industry. For the first time in 120 years, the US market was no longer the biggest. In a special report published in September 2013, American financial services company Standard & Poor’s (S&P) called it a “shift in the balance of power in the auto industry”. The scale had tilted in favor of the emerging markets led by China, India, Brazil and Eastern Europe. Together they accounted for slightly more than one half of the 73.2 million light vehicles sold worldwide in 2010! The share of emerging markets has steadily grown since–in 2011 it was 52%; in 2012, 54%; and in 2013, 55%.

Clearly, this trend held promise. And China, having overtaken the US, has emerged as the largest single-country, new-car market. Demand shot through the roof, telling the best of analysts how conservative their estimates had been. McKinsey & Co in its report, Bigger, Better, Broader: A Perspective on China’s Auto Market in 2020, estimated sales in China to touch 22 million in 2020. Way too late, considering that China came pretty close to achieving that feat in 2013 itself. If estimates by the China Association of Automobile Manufacturers (CAAM) hold true, the market will grow by 10% this year, taking the sales figure over 24 million.

McKinsey’s findings stemmed from the optimism imbued in the Chinese economy and those factors are still intact. Between 2011 and 2020, the Chinese economy is expected to continue growing at 7-8% annually; the percentage of the population residing in urban areas is expected to rise from 51% to 60%, thus giving a fillip to mobility demands; and the number of high-income urban households is likely to expand from 17% to 58%.

Neil Wang, Partner and Managing Director for business consulting firm Frost & Sullivan, China, reiterates: “China has become one of the most important markets for all global car manufacturers as most of them are facing a decline in demand caused by severe economic downturn.” As the recession set in, the Big Three–General Motors (GM), Ford and Chrysler–faced tremendous heat in the US. Unlike GM and Chrysler, Ford abstained from filing for bankruptcy and instead took a $23.5 billion secured loan by putting its iconic blue oval logo as collateral. Calling China a savior may not be wrong. Consider GM’s vehicle sales volume for year 2010–73.6% of it was generated outside the US, including 43% from emerging markets, such as Brazil, Russia, India and China (BRIC). For Ford as well the Asia-Pacific and Africa region (APA) is the fastest growing. By the end of this decade, it expects 60-70% of its growth to come from APA. China undoubtedly remains the star of the region.

Bill Russo, President and CEO of Synergistics Ltd., an automotive consultancy based in China, agrees on China’s prospects. “Urban middle class population and GDP levels will continue to rise, driving expansion. Rising wealth will continue to allow for a strong mix of premium models. Moreover, Chinese consumers favor famous foreign brands. Three out of four passenger cars sold in China carry a foreign brand.” According to CAAM too, the market share of Chinese brand passenger cars has continued to decline, making China the best bet for foreign players like Ford, GM and Volkswagen.

The ‘15 by 15’ Model

Ford China, one of the frontrunners eagerly seeking to tap China’s potential, is upbeat. The company sold 935,813 wholesale vehicles in China in 2013, a 49% increase over the previous year. John Lawler, Chairman and CEO of Ford China, interpreted the impressive performance as a “demonstration” of the continued progress of Ford’s “aggressive China growth strategy”.

Interestingly, the American auto major has pretty much adhered to the same strategy with which it entered China about two decades back–leveraging its global assets while simultaneously investing in local capabilities to bring a full line-up of vehicles. 

Research helped Ford understand that discerning Chinese customers keep in mind a number of factors before buying a car–fuel economy, design, how the vehicle matches their personality, etc. “(A) car is a major purchase in life, especially in China… it is a whole family affair where everyone, right from the buyer’s spouse to kid to parents, comes for the test drive and acts as a major influencer,” says Lynn Ouyang, a communications executive at Ford Asia Pacific.

Next steps followed. Regular surveys were conducted to understand customer’s preferences. Ford embedded Chinese and Indian engineers in product development groups so that local tastes could be designed into its vehicles. “The Chinese prefer robust back seats for sedans, plush leather, more in-car entertainment options… At the same time China is a very cost-conscious and diverse market,” adds Ouyang.

In adherence with the global One Ford plan (introduced in 2008, the One Ford plan seeks to balance Ford’s cost structure with its revenue and market share, accelerate development of new vehicles that customers want, finance Ford’s plan and rebuild its balance-sheet, and work together to leverage its resources around the world), Ford’s portfolio in China was created to include a full family of vehicles–small, medium and large. From performance vehicles (Focus ST, Fiesta ST), and sport utility vehicles (Explorer, Edge, Kuga, EcoSport), to sedans (Mondeo, Focus, Fiesta, S-MAX) and commercial vehicles (Transit).

In March 2012, while launching the Focus, Ford vowed to bring 15 new vehicles to China by 2015. So far, the plans seem to be on track. Last year Ford launched seven new vehicles in China—Focus ST, Fiesta ST, Explorer, Kuga, EcoSport and the all-new Ford Mondeo.

Focus, the sporty mid-size car, turned out to be the game changer for Ford. A bestseller, it led the fleet in 2013 as well with 403,640 wholesales (cars sent to dealerships) sold, up 36% over the previous year. It helped that Ford became the lead sponsor of singing reality show Chinese Idol and was able to connect with the masses. It was a tried-and-tested marketing strategy (Ford also sponsors American Idol in the US) that, Ouyang says, worked well in China as well. In terms of marketing strategy, Ford has also decided to have a pretty robust online presence in order to gain the attention of the 600 million internet users in China.

Gaining Ground in China

But anyone who has travelled to China knows that it is not just a country of the masses. According to a Research and Markets report titled Global Luxury Car Market: Trends & Opportunities (2012-2017), by 2017, the US and China will collectively represent 50% of the global premium opportunity in automobiles. Keeping this in mind, Ford is drawing up plans to introduce the Lincoln brand, a line that has a history spanning a century, in the latter half of this year. These cars will be imported and distributed through an all-new independent Lincoln brand dealer network. Ford’s vision for Lincoln in China is ambitious. “(The idea is) to attract luxury car buyers and offer a very personalized connection with the dealer, that individual touch which makes the brand different,” says Ouyang.

Ford’s roadmap for the future remains unchanged–refreshing the product lineup, expanding the dealer network, and enhancing the production capacity. As part of its strategy, it is looking at strengthening the regional operation by locating its Asia-Pacific team in China. Ford has been operating in China through two joint ventures (JVs): Changan Ford Automobile (CAF) and Jiangling Motors Corporation Ltd. (JMC), which assemble Ford and JMC vehicles for distribution in China. It sure is shifting gears and getting into the fast lane here. “China is the world’s largest growth market, and we expect tier 4 to tier 6 markets to see the greatest growth over the next five years. To cater to the diversified needs, we will further expand our vehicle offerings to increase our market coverage in China from 22% in 2009 to 50% in 2015. We will also more than double the number of CAF dealerships from 340 (as in 2010) to 700 by 2015. JMC dealerships will also almost double from 116 in 2010 to 220 in 2015,” adds Ouyang. Ford has planned to open most of the new dealerships in tier four to tier six cities. Each dealer is chosen with utmost care–one that offers high level of customer service and does not hard sell to customers.

China’s auto market is not an easy one to navigate. Bill Russo of Synergistics Ltd. says the first order drivers of success in the market can be linked to product relevance and brand acceptance which are often the barriers to market entry. “While these are essential, the secondary drivers of success are more complex,” he says. These include local partner strategic alignment, JV management, R&D localization, competitive cost structure/local sourcing, manufacturing localization, and distribution network capability (for sales and service). According to Russo, the market leaders are Volkswagen (with SVW and FAW-VW/Audi), General Motors (with SGM and SGM-Wuling), Hyundai (with Beijing Hyundai), and BMW (Brilliance-BMW).  “More recently, Ford has gained ground because they are investing in introducing new products which allows them to clear the first-order drivers of success,” he adds.

Here’s a glimpse: Ford has invested over $4.9 billion in China and employs over 26,000 people in its wholly-owned entities and JVs. It currently has nine plants in the country, including three new plants and a research and engineering center under construction. Success in terms of financial returns is difficult to judge because Ford does not break up its revenues country-wise. “Ford Asia Pacific will account for 60-70% of the company’s growth in the next 10 years. China is a big part of it,” says Ford’s Ouyang.

Frost & Sullivan’s Neil Wang points at two crucial challenges that may have a bearing on the success of any MNC auto major in China: the local governments from Tier 1 and even Tier 2 cities, including Beijing, Shanghai, Guangzhou and Tianjin have issued strict policies to control the growth of vehicles. “More cities, like Chongqing, Chengdu and Hangzhou, may issue similar policies to limit the new car sales and registration to ease the issues of urban traffic congestion and air pollution in the coming future. The pricing strategy is equally, if not more, important. Majority of the Chinese customers are first-time buyers and are therefore quite sensitive towards the cost of affording a car—the retail price of the vehicle and even the upcoming maintenance cost.”

Ford is trying to address these concerns. “Locally-produced vehicles do have a price advantage over imported ones,” says Ford’s Ouyang. So as the vehicles roll out of Ford’s manufacturing plants, the Chinese customers stand to gain in terms of price value. He adds, “When we produce 1.2 million vehicles locally, the scale will help us in achieving resource optimization and in getting better prices from the suppliers. We will be able to pass on that value to our customers.”

For the rising environmental concerns, Ford banks on technology to improve fuel efficiency and reduce carbon dioxide emissions. It is working towards bringing 20 new powertrain products to the country and improving fuel economy by up to 20% (compared to 2010) by 2015.

Despite the fact that Ford entered China almost two decades back, it has much ground to cover before it can inch closer to GM and Volkswagen, the two players that currently lead in China. The two early birds started investing heavily in China in the 1990s, long before Ford. But for now, there is no denying that Ford is playing the catch-up game pretty well. 

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China’s indigenous brand policy backfires

The Financial Times, May 5, 2014

Even the most ardent car lovers would struggle to identify some of the vehicles built by major multinational auto companies in China.

A BMW Brilliance Zinoro, an SGMW Baojun and a Dongfeng Nissan Venucia are among the “indigenous” brands that the Chinese government requires foreign-invested joint ventures to develop in return for approvals to expand production capacity in the world’s largest auto market.

SGMW – GM’s joint venture with SAIC Motor and Liuzhou Wuling Motors – embraced the dictat by developing popular Baojun sedans and mini-cars. SGMW sold more than 100,000 Baojuns in 2013, up almost 20 per cent.

Priced at just Rmb50,000 ($8,000) to Rmb70,000, Baojun’s success has come primarily at the expense of China’s struggling domestic automakers, suggesting that the policy has had at least one unintended consequence.

“After several decades in China, the earliest models introduced by the foreign joint ventures are now priced as cheaply as Chinese brands,” Liu Bo, vice-president of Chang’an Auto, said at a seminar held in conjunction with April’s Beijing car show. “Their ability to focus global R&D resources on the China market is putting a lot of pressure on us.”

March sales of Chinese brand sedans fell 12 per cent year-on-year, as local automakers lost their market lead in the segment to their German rivals led by VW. “The indigenous brand policy is really dumb because all it does is cannibalise the local Chinese brands,” said Janet Lewis, head of Macquarie Securities industrials research team in Hong Kong.

The damage that Baojun and other joint ventures’ indigenous brands, such as Nissan and Dongfeng Motors’ Venucia, are inflicting on Chinese car companies could explain why the government does not appear to be putting much pressure on multinationals who have only done the bare minimum.

BMW’s joint venture with Brilliance Auto “rebadged” the German company’s X1 and electrified it for China’s anaemic new energy vehicle market – thus avoiding confusion with its better selling conventional cars – while Ford has yet to reveal its local contribution to the market.

“Zinoro is a brand of our joint venture here in China,” Karsten Engel, BMW’s country head, said at the Beijing car show. “It’s a brand only for China. It’s based a little bit on the BMW X1.”

BMW chose not to display the Zinoro at the show, instead highlighting its premium i3 electric car. “BMW’s i3 could generate interest in China,” said Bill Russo, founder of industry consultancy Synergistics. “Zinoro doesn’t have the brand panache. Even if it’s an X1 [customers] want to be able to call it what it is.”

The Chinese government’s indigenous brand requirement is particularly challenging for Ford as it runs counter to outgoing chief executive Alan Mulally’s “one Ford” strategy, under which the company jettisoned brands such as Jaguar Land Rover and Volvo Cars to focus on a narrower portfolio.

“We were trying to be world class at so many things,” said Mr Mulally, adding that the strategy was in keeping with the vision of the company’s eponymous founder. “Henry [Ford] wanted to be part of the fabric of economic development in every country in which he operated but he didn’t know that Ford would have a different Ford in every country.”

John Lawler, the head of Ford’s China operations, insisted that the US automaker is in compliance with Chinese government policy mandates, even though it still has not rolled out an indigenous brand.

“We’re satisfying all the requirements from the government but at this point there really isn’t anything for us to announce relative to an indigenous brand or anything along those lines,” said Mr Lawler.

Additional reporting by Wan Li

Click here to read this article at FT.com

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

Stuck in First Gear: Chinese Car Companies Struggle to Compete with Foreign Brands

CKGSB Knowledge, July 30, 2013

Foreign car makers are under attack in China while Chinese auto manufacturers have yet to achieve real success

Can foreign car makers in China continue to dominate the market while appeasing Chinese car companies?

CCTV, Chinaʼs powerful state-run television broadcaster, unleashed a torrent of faulty vehicle claims against foreign automakers in March. First, the network targeted Volkswagen, alleging transmission issues with some of its cars, which led to the recall of more than 380,000 vehicles at an estimated cost of $618 million. The broadcaster then attacked BMW and Daimler, who were accused of selling cars that produced harmful fumes.

The media’s indictment of foreign car makers dovetails with China’s policy to nurture indigenous players. From removing financial incentives for foreign car makers to requiring they launch Chinese car brands, Beijing has tried to curtail the seemingly endless popularity of non-local autos as domestic brands continue to cede ground to their foreign counterparts. Foreign auto manufacturers first set foot in the Chinese car market 30 years ago, fully aware that the state allowed their entry into the market on the condition that they enter into joint ventures (JVs) with domestic firms, who were expected to benefit from their technical expertise. Despite a lack of complete freedom, they’ve flourished ever since, but the latest round of government-sanctioned media criticisms may force foreign companies to change tack.

Slow Start for Chinese Cars

The Chinese car industry has grown rapidly since the nation opened its doors in 1972, shouldering past the US in 2009 to become the word’s largest. Domestic players have profited from this expansion, but their market share is receding compared to foreign car makers: the 30% portion held by Chinese car brands at the end of 2009 fell to 26% in 2012 according to financial research firm Sanford C. Bernstein.

This is not the turn of events China hoped for when it granted foreign auto manufacturers market access in 1984. Beijing knew its car makers were behind the curve on precision manufacturing, so it encouraged JVs with foreign firms to bolster domestic tech-expertise, hopefully leading to a globally recognized national champion.

“The joint venture policy towards the auto businesses in China has always been one of ‘youʼre a guest, youʼre invited and we will tell you the rules by which you must play,ʼ” says William Russo, (formerly a) Senior Advisor at consulting company Booz & Co.

In 1984, Zhao Ziyang, Chinaʼs then premier, said JVs would facilitate the consolidation of the auto market into three large and three small producers, with high levels of local content. Zhaoʼs vision has not come to pass. Different outlets give different estimates—The Wall Street Journal said there were 170 Chinese car makers as of April this year, while the International Business Times cited only 115 companies as of 2012, neither news outlet divulging the source of their information—the China Association of Automobile Manufacturers declined to confirm any specific figure. Either way, even the ballpark is well off from Zhaoʼs prescription.

Not only has consolidation not occurred, but local car makers also remain umbilically dependent on their foreign JVs for profits. Shanghai Automotive Industry Corporation (SAIC), Chinaʼs largest car manufacturer, owes 90% of its sales to its foreign JVs, according to a research paper from January this year called “Case Study: SAIC Motor Corporation” published by the US think tank Center for Strategic and International Studies (CSIS). And no Chinese car maker has managed to design and produce a single car that has won global acclaim.

In stark contrast, foreign car makers have thrived. “The Chinese car market is very orientated towards foreign brands. Three out of every four cars sold in China carry a foreign brand,” says Russo.

The China car market, now General Motorʼs (GM) largest, was the US companyʼs savior during the financial crisis, as sales in the nation helped it heave itself out of bankruptcy proceedings in 2009. Since the firm tied itself to SAIC nine years ago, it has amassed 14.7% of Chinaʼs market share, earning a profit of $1.5 billion in 2011 from its joint venture, according to GM China reports. Still confident of its position in China, GM aims to increase sales by 75% in two years to 5 million cars.

China is also Audiʼs most lucrative market. The German manufacturerʼs sales increased by 14.2% in the first quarter of 2013, to almost 103,000 vehicles and it is planning to open a new plant in Foshan, Guangdong province, which will have a manufacturing capacity of 150,000 cars annually when it opens for production at the end of this year according to state-run China Daily.

Still Second Choice

Chinese consumers are buying foreign brands over local ones, because domestic makers are finding it hard to shake off poor repute. “The challenge that Chinese car companies have is convincing their own consumers that Chinese companies in fact can make good cars,” says Russo.

A number of Chinese brand cars have failed foreign safety standards, sullying the reputation of Chinese car makers and making it difficult for indigenous brands to market themselves at home and abroad. Brilliance China Automotive, a firm tied to both Bayerische and Toyota, tried to sell its BS6 sedan in Europe in 2007, but earned only one out of five stars for safety from a German car association, which said the driver would have little chance of surviving a side collision.


(Source: Youtube, Youku video here.)

Chinese car companies find it tough to ratchet up the quality, in part because they lag on research and development spending. “Most Chinese companies are thinking five to six years out with their R&D spending and trying to compete with international companies that are already thinking 20 to 25 years out,” says Nat Ahrens, Deputy Director and Fellow of the Hills Program on Governance at CSIS.

This thrifty approach means Chinese car companies have less to spend on nurturing innovative engineering and design. Instead of creating a car from scratch, which would allow them to claim half the patent rights, Chinese JV partners take existing foreign vehicle blueprints, make a few changes and call it a new JV auto: GM and SAICʼs first JV car, Baojun 630, is built on the old Buick Excelle, while Dongfeng and Nissanʼs fi rst Venucia vehicle is fashioned after Tiida. By taking the path of least resistance, Chinese JV companies demonstrate to the consumer their reliance on foreign tech for quality, which does little to raise confidence in their own brands.

Chinese brands are gaining ground on locally made foreign brands as sales have grown steadily in 2012

Driven to Distraction
The relative success of Western brands against languid domestic ones has sparked indignation and embarrassment among Chinese commentators. In January, Communist Party mouthpiece The Peopleʼs Daily blamed foreign companies for the sluggish performance of domestic players, writing, “Most Chinese car companies involved with JVs have not received the technology they were promised.” In September last year, former machinery and industry minister He Guangyuan said JVs are “like opium” and likened Chinaʼs JV policy to a negative addiction. “So many years have passed and we donʼt even have one brand that can be competitive in the auto word,” He said.

But some feel that Chinaʼs expectations of tech transfer were too high. “I donʼt think any promises were broken, these contracts are laid out very clearly on what was going to be transferred and what wasnʼt… I donʼt think that there was any deception on the part of the foreign partners,” says Ahrens. “You canʼt force technology transfer.”

Market Remodel

As the strength of Western brands has grown, China has pushed back by trimming the incentives and freedoms of foreign automakers. In January last year, China said it would no longer promote investments from foreign car makers through preferential tax treatment and streamlined approval processes, increasing costs for foreign manufacturers.

The month after, Beijing excluded foreign car makers from a newly released list of approved vehicles for government use. While this measure will have little impact on the profits of foreign car makers such as Audi and Mercedes (brands that were included on previous lists), it signaled Beijingʼs determination to freeze out nonlocal competition. In April of the same year, Maxime Picat, the Director General of Peugeot-Citroenʼs Chinese joint venture, said Beijing was threatening to restrict the firmʼs manufacturing expansion plans unless it launched local brands.

The squeeze on foreign auto manufacturers is likely to put a strain on existing JV relationships, making the negotiation process for new deals increasingly delicate. The conflict inherent in a joint venture between two would-be competitors is clear. “A foreign companyʼs interest is not to nurture a local company so that it is as successful or more successful than itself. It will undoubtedly withhold some of its crucial technology,” says Teng Bingsheng, Associate Professor of Strategic Management at the Cheung Kong Graduate School of Business. At the same time, domestic firms are bartering with access to the largest auto market in the world at a time when foreign firms, whose own markets are drying up, can ill afford to be choosy. Under government pressure, the biggest challenge for an existing foreign JV partner will be how to relinquish enough intellectual property to placate Beijing, while at the same time, invest sufficient amounts in R&D to maintain its lead over local and other international players.

But Chinaʼs actions are not likely to wean consumers off foreign brands as the central issue is one of demand not supply. “Government policy cannot change the nature of demand. Chinese consumers will spend their money on the brands they prefer and there is very little that can be done to force Chinese consumers to buy Chinese brands,” says Russo.

This Chinese consumer preference is likely why state media reports went after foreign car makers to begin with, to damage their brand equity in hopes of restoring balance between foreign and domestic brand preference. But it will take more than a few quality-control reports to undo the brand resonance of foreign cars. Chinese brands will have to spend a significant amount of time garnering consumer confidence before they become as popular as well known international car makers.

The Chinese government’s distortion of the market may also have unintended consequences. The launch of new domestic brands by forcing JVs will add another level of competition to an already fragmented market and take business away from Chinese companies who are already struggling to build their market share. By ramping up competition, China in fact weakens the position of wholly domestic brands like Chery and BYD, thus stifling their own plans for a national champion.

“For example, if GM launches a domestic brand, customers that would otherwise be buying a Chery or BYD car will see a car coming from Shanghai General Motors [the GM joint venture with SAIC] and will buy that instead,” says Russo. “So they [the State] are going to eat their own young.”

Just a Fender Bender

Despite Beijingʼs cooling approach to foreign car makers, the countryʼs leaders are unlikely to stifle them completely. “At the end of the day, the government wants to see the domestic car industry succeed, but many of the Chinese companies depend on successful foreign joint ventures to contribute to their profitability and they wonʼt do anything to harm those companies, because that would ultimately harm the whole industry,” says Russo.

In spite of the complications, foreign car makers are finding their tie-ups beneficial in some ways. GM is using SAICʼs low-cost vehicle technology to vault into emerging Asian markets. SAICʼs technology for producing cars priced as low as $4,800 is central to GMʼs plans to plugmiddle-class needs in India and Indonesia. Also it has been reported that BMW and Chinese Brilliance brand Zhi Nuo—which roughly translates as “The Promise”—may start exporting their vehicles to Europe.

The governmentʼs latest measures to suckle a national auto champion are unlikely to seriously dent foreign makersʼ prospects in the short-term. Ultimately, consumer choice determines the winners and losers and the Chinese are increasingly buying foreign brand vehicles. Also, the structure of the market is so dependent on symbiotic JVs that separation in the near term would damage both parties.

The biggest long-term threat to foreign car makers in China is competition from increasingly sophisticated Chinese brands, whose manufacturing skills are developing steadily. Nissan and Honda, two Japanese brands known for their attention to detail, stated publicly that they now outsource heavily to local Chinese suppliers. Quintessentially precise Mercedes-Benz-manufacturer Daimler opened a trial engine production plant in China in May. A decade ago, this would have been unthinkable given the quality of production in China.

Experts draw comparisons between the fledgling Chinese car market and the early Japanese one. In the 1970s, consumers largely thought of Japanese cars as cheap machines. Now, Japanese manufacturers produce premium lines. Hyundai was originally well known for its affordably priced cars, and now makes very innovative, high-quality products. “Great Wall, Geely and Shanghai Auto are capable of making good, quality cars and give an indication that the Chinese car industry will be able to produce a globally competitive car company,” says Russo. “Itʼs a question of time.”

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GM’s China Bet Mimics Toyota’s Bet on U.S. Last Century

Bloomberg Business Week, April 29, 2013

GM’s announcement at the Shanghai auto show this month that it is spending $11 billion by 2016 

on new plants, products and people in China demonstrates a change in priorities. 

By Keith Naughton

General Motors Co. (GM), the largest carmaker in the U.S., is shifting its center of gravity to China, where it sells more cars and now invests more money.

GM’s announcement at the Shanghai auto show this month that it is spending $11 billion by 2016 on new plants, products and people in China demonstrates a change in priorities. Since its 2009 bankruptcy, GM has announced $8.5 billion of investment in the U.S., where it has a more modest assembly-plant footprint.

GM’s focus on China parallels the strategy Toyota Motor Corp. (7201) employed in the last century, when the Japanese automaker poured investment in the U.S. market, where it saw its greatest growth potential. Now, Detroit-based GM is taking the lead in the world’s largest auto market by building four new assembly plants in China to boost its factory capacity to 5 million vehicles annually, twice what it sold in the U.S. last year.

“This is what the Japanese did in the ’70s when the U.S. became their most important market,” said Rebecca Lindland, an automotive consultant with Rebel Three Media & Consultants in Cos Cob, Connecticut. “What GM is doing is really smart because it’s proactively investing in a market that, for the foreseeable future, is going to be the world’s largest.”

GM rose to a 52-week high of $30.71 last week. It rose 0.3 percent to $30.58 at 9:52 a.m. New York time. It gained 5.8 percent this year through April 26 compared with an 11 percent increase in the Standard & Poor’s 500 Index. The company will announce quarterly results May 2.

‘Center Stage’

GM already is the No. 1 automaker in China, with 15.1 percent of the market in the first quarter on growing sales of Buick and Chevrolet models and a thriving commercial-vehicle joint venture. It’s rolling out 17 models there this year, including a renewed push to sell its Cadillac luxury line to the increasingly affluent Chinese. And it’s expanding its Chinese dealer network to 5,100, from 3,800.

“China has become the center stage in the battle for dominance of the 21st century global auto industry and GM is investing to secure its leadership position,” said Bill Russo, president of auto consultant Synergistics Ltd. in Shanghai. “GM is investing to ensure that they can differentiate themselves from the crowd by having a full product shelf and a dealer network.”

China is central to Chief Executive Officer Dan Akerson’s plan to diversify GM’s sources of profits around the planet. While North America remains GM’s biggest profit center, China has emerged as the leader in other key measures -- sales, output and investment. Analysts say it’s just a matter of time before China becomes GM’s biggest profit center.

“It wouldn’t be difficult to see this flip sometime between now and 2020 for sure,” Jeff Schuster, an analyst with LMC Automotive, said of China’s potential to become GM’s profit leader.

‘Big Bet?’

GM’s factory build-up will give it 17 assembly plants in China, said Bob Socia, GM’s top executive in the country, exceeding the 12 it has in the U.S. GM’s dealer count in China will also surpass the 4,343 showrooms it has in its home market. GM has been selling more vehicles in China since 2010.

While China’s economic growth slowed to 7.7 percent in the first quarter, automakers still see it as an attractive market.

Asked why GM is making such a large bet on China, Socia scoffed at the idea of a gamble.
“Big bet?” he said. “We’re confident about playing here in China. We’re here for the long term and you’ve got to lead and be strong in your commitment. We’re very bullish.”

Even more bullish than others. While LMC forecasts the market reaching 32 million vehicles by 2020, GM predicts it will grow to 35 million by 2022. That’s up from 19.4 million last year. China in 2009 surpassed the U.S. market, where dealers sold 14.5 million cars and light trucks last year, the most since 2007. The U.S. record is 17.4 million in 2000.

GM-VW China Rivalry Heats Up as Both See 3 Million Auto Sales

Bloomberg News, April 21, 2013

Click here to read the article published in The Washington Post

General Motors Co. and Volkswagen AG, the largest foreign carmakers in China, both forecast sales will climb to 3 million vehicles in the country this year as the rivalry heats up for a second year.

GM is “cautiously optimistic” and expects its sales to reach that level if market fundamentals are strong, Bob Socia, head of China operations, said in an interview at the Shanghai Auto Show yesterday. His Volkswagen counterpart, Jochem Heizmann, said a day earlier that the German carmaker expects deliveries to reach that number or beyond. Both companies sold about 2.8 million vehicles in China last year.

The projections signal competition -- GM’s lead over VW in China shrank to less than 1 percent in 2012 -- will intensify as their sales slow in their biggest market. At stake is supremacy in China, which may become the first market with more than 20 million vehicle sales this year, and where car-ownership levels are still a fraction of those in the U.S. and Western Europe.

“In terms of their presence, GM may be in a better position with their strong network and a more complete product portfolio,” said Bill Russo, president of automotive consultancy Synergistics Ltd. Still, most carmakers “are probably anticipating market expansion to be not as robust as it has been in the past, and the supply-and-demand imbalance is creating additional pressure on pricing,” he said.

Heizmann’s Apology

Wolfsburg, Germany-based VW, facing a European auto market headed toward a 20-year low, is seeking to rebuild its image after a state broadcaster’s report on defective gearboxes in VW cars prompted the German company to recall a record 384,181 vehicles in China. Heizmann expressed his personal apologies over the matter at an April 19 event in Shanghai.

Apologies may not suffice. More than a dozen stone-faced riot police in black flack jackets and helmets lined the VW stand yesterday morning. Across the aisle at the Buick stand, a young American couple modeled beside the Riviera concept car, where a man wore a silver shark-skin suit evoking Frank Sinatra, while female models preened in a metallic silver sheath mini- dresses and high heels.

The incident hasn’t deterred the German company’s expansion plans. VW forecast it will increase its China line-up 29 percent to 90 models by 2015, invest 9.8 billion euros ($12.8 billion), and expand production there 60 percent by 2018.

‘Squeezed’ Margins

GM, which outsold VW in China last quarter after trailing the German carmaker for two quarters, isn’t ready to relinquish the lead. The company showcased a record 53 vehicles at the Shanghai show, including the Buick Riviera concept vehicle, the Chevrolet Cruze hatchback and Cadillac Escalade ESV. The company plans to spend $11 billion in China by 2016.

Still, GM is mindful of the competition and China is a market where margins will “always be squeezed,” he said.

There’s more to China than just GM and VW as other previewed their offerings to Chinese consumers at the Shanghai show. Sport utility vehicles -- the fastest growing segment of China’s auto market -- stood out. Honda Motor Co. showed its concept Acura SUV-X that will be produced in China, Ford Motor Co. said it plans to debut two small SUV models in the market this year, and Daimler AG showed off its planned Mercedes GLA.

Chrysler Group LLC’s Jeep, which became the first western auto brand built in China in 1983, may resume Chinese production by the end of next year, starting with the Cherokee, Mike Manley, head of the brand, said in an interview. Ford has received an “incredible” number of pre-orders for its EcoSport and Kuga SUVs that debut this year, Jim Farley, the automaker’s global marketing chief, said in an interview.

SUVs Shine

At GM’s Cadillac stand, a pearl-white Escalade ESV rotated on stage as a model in a white brocade gown posed for a throng of photographers. Curious showgoers piled into the front and back seats of SUVs at GM’s Buick and Chevrolet stands.

“SUVs are considered a status symbol of the advancements you’ve made so far in your life,” said Manley. “As you get better ride and handling and fuel economy in SUVs, you see people migrating out of passenger cars.”

Automakers have reason to be optimistic about SUVs. Sales of the vehicles will probably rise 23 percent to 2.46 million units, outpacing all segments in 2013 for a second straight year, according to the state-backed China Association of Automobile Manufacturers. Chinese SUVs are also doing well, with Great Motor Co.’s sales of its Haval vehicles surging 92 percent during the first quarter.

Crowding Market

Luxury carmakers continued their push to capitalize on China’s growing number of wealthy consumers. Daimler said it plans to increase its number of dealers by about 30 percent this year and BMW’s Rolls-Royce is planning to expand its network by 25 percent.

The Chinese market, cluttered with more than 90 brands of vehicles, may get even more crowded as Volvo Cars and Jaguar Land Rover prepare to begin production in the country. The extent of the choices available, can sometimes overwhelm consumers.

“There are so many options nowadays,” said Kenneth Zheng, 32, who was checking out Renault SA’s 320,800 yuan ($51,900) Talisman sedan at the Shanghai show. “I am totally lost just by touring around here. Popular models like Buick or Passat may be the safest choice.”

Nissan Motor Co.’s Infiniti will make two long-wheelbase models in the country, following VW’s Audi, Daimler’s Mercedes and BMW in stretching the length of their vehicles to cater to Chinese tastes.

Japanese Rebound

Nissan, which outsells Toyota Motor Corp. in China, said it’s expecting a 16 percent increase in sales at its Chinese venture this year as anti-Japan sentiment, triggered by a dispute over uninhabited islands last year, subsides from the protests that flared in September. Nissan, Toyota and Honda all saw their China sales fall last year, a slump that extended into the first quarter.

Still, for companies such as Nissan, the bigger challenge may be figuring out how to make cars that appeal to Chinese youths. Young people today are very tech-savvy, very much connected and social media is very important, so vehicles should bring friends together in the car and allow them to share social media content, according to Nissan Executive Vice President Andy Palmer.

“If you look at all the segments all around the world, the single biggest segment globally is ‘ba ling hou,’” Palmer said in an interview, referring to the Chinese word for people born in 1980 and beyond. “240 million people in the segment and nobody is really addressing on the global maker level. We think the needs of these customers are going to change the face of automotive not just in China, but globally.”

--Alexandra Ho, Christoph Rauwald, Keith Naughton, Tian Ying, Ma Jie, Yuki Hagiwara, Stephen Engle and Anna Mukai. Editors: Young-Sam Cho, Chua Kong Ho

Mulally Hones Ford's China Focus

The Wall Street Journal, April 15, 2013

By MIKE RAMSEY

Associated Press

Ford's Alan Mulally, shown in Beijing last August, is spending more time in China amid big new investments.

SHANGHAI—Just a few years ago, Alan Mulally, Ford Motor Co.'s chief executive, spent about 10% of his time on matters related to China. These days, the world's largest auto market consumes about one-third of his and his top lieutenants' schedules, each week.

The increased focus is key for Ford's future because the company has a lot of ground to make up here. A latecomer to China, the Dearborn, Mich., auto maker has about 3% of the Chinese market. Volkswagen AG  puts its share at 18.2% and General Motors Co. calculates its 2012 share at 14.6%.

Moreover, Ford is spending big to catch up. The company has committed to spending $5 billion to build five plants in China to go along with the four it has now, and will need to increase its market share to be able to use all the plants' output. The auto maker also is aiming to double the number of dealerships to about 800 by 2015, bring 15 new vehicles to China and launch the Lincoln brand here in 2014.

"Clearly this is going to continue to be the highest rate growth for us, both in revenue and profits, over the next few years," Mr. Mulally said in an interview on the eve of this month's Shanghai auto show. "The entire team is spending more and more time in Asia-Pacific."

On Monday, Ford Asia chief David Schoch predicted the company's market share here might reach 6% of sales after Ford completes a model build-out in 2015.

Many foreign companies in autos and other industries are now getting a sense of the subtleties and complexity of operating in modern China. In recent weeks, even long-established foreign companies with legions of Chinese fans have run into unexpected difficulties.

Apple Inc. made a public apology recently after state-run media published reports about customer-service flaws. Volkswagen was pressured into an expensive transmission recall after another Chinese TV report called into question the quality of its gearboxes. Likewise, Japanese auto makers are still struggling to regain sales after a heated dispute over uninhabited islands in the East China Sea pummeled their sales in China.

After years of approving new auto factories, the Chinese government has become concerned about excess production capacity and now tends to be more cautious about approving new plants. The government also is keen to see domestic brands become more competitive with foreign makes, Mr. Mulally said.

Ford began producing cars in a Chinese joint venture in 2003, four years after GM and 18 years after Volkswagen. The late arrival caused Ford to miss out on partnerships with the larger car companies in the coastal cities of Shanghai and Beijing, where the bulk of car buyers have been in the past decade.

Ford has a joint venture with Chongqing Changan Automobile Co., based in Chongqing, in the country's interior. Ford is hoping to catch a second wave of growth as economic development spreads to second- and third-tier cities, which tend to be less wealthy than Beijing and Shanghai but still have huge populations.

In a reflection of its efforts to put China into the center of decision-making, Ford's U.S. management is shifting U.S. meetings to early in the morning or late in the evening in order to better accommodate executives in China, who are 12 hours ahead.

"We get up really early, we stay really late," said Mark Fields, Ford's chief operating officer, who recently ran a business meeting from a conference room in Shanghai until past midnight local time. "It gives us the sensitivity that we are a 24-hour business."

The company soon will start producing a new 1.5-liter, four-cylinder engine that was developed in part to avoid a Chinese tax of about $300 a year on vehicles with engines larger than 1.5 liters. The new engine will be sold in markets around the world, including the U.S., beginning in September. It will be offered alongside a 1.6-liter motor in some markets.

Mr. Mulally has decades of experience and many business and governmental contacts in China as a result of his 37 years at Boeing Co. BA +2.14% and the last six at Ford. Two weeks ago, he was one of 100 delegates at the China Development Forum in Beijing, a gathering that brought together China's new political leaders and CEOs from around the globe.

"It was very exciting because we had all of the new Chinese leadership there," Mr. Mulally said. Deciding to push forward with the $5 billion expansion was "one of the most important decisions we made six years ago. The minute we made the decision, we were very focused on it, especially me."

He also makes visits to the Chongqing mayor's International Economic Advisory Council.

"At the most fundamental level, being involved is really, really important," Mr. Mulally said. "We feel very, very comfortable with our position there."

In the first quarter of this year, Ford's sales in China rose 54% over a year earlier, driven by its Focus compact. It just started selling the Kuga sport-utility vehicle, a clone of the Escape SUV, and the larger Explorer SUV, which is being exported to China this month.

Although GM and Volkswagen continue to expand in China, Ford is gaining on its Japanese competitors, which have been hurt by the political backlash stemming from a dispute between China and Japan over islands in the East China Sea. Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co. have suffered declining sales amid the tensions.

"You've got this situation where you have a whole bunch of Japanese brand [shoppers] looking for something else," said Bill Russo, founder and president of auto consulting firm Synergistics Ltd. and a former DaimlerChrysler AG  executive. "Ford is really hitting its stride at the best possible moment."

A version of this article appeared April 16, 2013, on page B7 in the U.S. edition of The Wall Street Journal, with the headline: Ford CEO Revs Up Auto Maker's China Role.