Too Many Car Factories in China?

Bloomberg News, February 13, 2015

Automakers have been successful at adding factories. Maybe too successful

When consultant Bill Russo visited Chery Automobile’s headquarters in China’s eastern Anhui province about three years ago, he listened to the company’s plans to expand its factories to make as many as 1 million vehicles a year. But demand didn’t grow as planned. So Chery today has the capacity to make 900,000 vehicles annually—twice the number of cars it sold last year. Sales have slumped by one-third since their peak in 2010.

“Chery is a classic case” of overcapacity, says Russo, a former Chrysler executive who’s now a Shanghai-based managing director at consultant Gao Feng Advisory. “The pressure is that once they receive the permission [from government authorities] to build, they feel like they have to build.” Chery didn’t respond to requests for comment about its sales falling short of planned capacity. 

Domestic and foreign-based carmakers are building more factories in China than anywhere else, a construction binge that risks hurting margins in what remains one of the world’s most profitable vehicle markets. By 2017 there will be 140 car production plants in China, vs. 123 at the end of 2014, estimates JSC Automotive Consulting. 

According to IHS Automotive forecasts, factories across the mainland in 2015 will be able to build 10.8 million more vehicles than will be sold in Greater China. In North America, however, IHS expects plants to churn out about 3.2 million more cars this year than the factories were intended to produce when they were built. 

140Estimated number of auto plants in China by the end of 2017, up from 123 at the end of last year

Overcapacity is only expected to get worse for Chinese carmakers. China will have about 11.4 million vehicles’ worth of idle capacity by 2017, more than double that of European automakers, according to data from JSC and Deloitte Consulting. 

Some carmakers already are regretting plans for Chinese plants that will open in the next few years, says Jochen Siebert, Shanghai-based managing director of JSC, who declines to name the companies. “But that decision has been made,” he says. “It’s done; they cannot backtrack.” 

Plans for most of the factory space built in China in the past few years were put in motion during the global recession, when China proved to be a godsend while General Motors and Chrysler were being bailed out by the U.S. taxpayer and Europe’s auto sales seemed in free fall. The trouble is, too many carmakers sought the same refuge. 

“When you get too many competitors with too much capacity, there’s just not enough growth to sustain everybody,” says Thomas Callarman, Shanghai-based director of the China Europe International Business School’s Centre for Automotive Research. “They’re all smart people, and they look at the right things, but I think they read the tea leaves wrong.” 

For now, the China car market remains profitable. Chinese automakers accounted for 7 of the 10 carmakers with the highest profit margins in the world, with BMW’s Chinese partner, Brilliance China Automotive Holdings, topping the ranks at 8.2 percent in the past year, according to data compiled by Bloomberg Intelligence. Toyota Motor’s margin was 7.6 percent. Hyundai Motor and Volkswagen’s Audi count China as their largest market, with Subaru maker Fuji Heavy Industries standing out as the only car manufacturer among the 10 most profitable that doesn’t have a factory in China. 

 

Foreign carmakers have been among the most enthusiastic factory builders in China, with Hyundai, Renault, and Fiat Chrysler Automobiles’ Jeep among those that have announced plans or are already building in China. 

GM will soon sell Buicks made at a plant that opened last month, with plans to open a Cadillac factory later this year. GM has 22 factories on the mainland. Volkswagen, which is vying with Toyota and GM for the global auto sales crown, has 28 plants in China and will open three more within the next few years. 

Jochem Heizmann, who heads Volkswagen’s China business, told reporters in November that the automaker has decided to expand its China capacity to more than the previously targeted 4 million autos a year by 2018 because it couldn’t build enough to keep up with demand. 

In the next few years, however, increased competition amid slowing growth in car sales will result in lower prices, says Yang Yipeng, a Beijing-based analyst at Goldman Sachs’s Chinese affiliate. As the world’s second-largest economy cools, vehicle sales are forecast to expand this year at just half of 2013’s 8 percent growth, to 21.3 million passenger vehicles. General Motors President Dan Ammann said in January that he expects China’s sales expansion to slow over the next few years after being the main engine for the global industry’s growth for 15 years. Volkswagen in November also said the pace of expansion is becoming “more normal” in China. 

The spare capacity may force carmakers to increase sales incentives, hurting profit margins, Barclays says. “This is a heavy asset industry,” says Song Yang, an analyst at Barclays. “When utilization trends down, margins will trend down.” Already, car dealerships in China are asking for financial support and lower sales targets from carmakers after a combination of rapid expansion of sales networks and increased restrictions on vehicle ownership by city governments hurt their profits. BMW agreed last month to pay 5.1 billion yuan ($815 million) to its dealers. Toyota will give $200 million to the dealers of one of its joint-venture partners, FAW Group, while Renault, which is building a plant that opens in China next year, said it will give its distributors more rebates. 

The bottom line: By 2017, plants in China will be able to produce 11.4 million more cars than will be sold there, JSC Automotive forecasts.

China to probe car market competition

The Financial Times, June 11, 2014

China is conducting a review of potentially anti-competitive behaviour in the world’s largest car market, the commerce ministry said on Tuesday, as new sales data showed that foreign brands were continuing to acquire market share at the expense of their struggling domestic rivals.

Qiu Zhongyi, a ministry official, confirmed that Beijing had asked industry associations in a range of sectors to share information on problems ranging from monopoly practices to local protectionism. “We want to understand the challenges they are facing,” he said, adding that the review covered dozens of industries including cars, pharmaceuticals and alcohol.

The survey document, circulated late last month, said the reviews were being conducted in accordance with the Chinese Communist party’s pledge in November to ensure that market forces would play a “decisive” role in the economy.

May vehicle sales increased 8.5 per cent year on year to 1.9m units, according to the China Association of Automobile Manufacturers, a domestic lobby group. “If the economy is slowing down, there’s no evidence of that in the auto industry,” said Bill Russo at automotive consultancy Synergistics.

But sales of Chinese brand vehicles again trailed the wider market, growing just 5.4 per cent. “Competition between Chinese brands and foreign brands, and among foreign brands themselves, is intensifying,” Yao Jie, CAAM deputy secretary-general, said at the association’s monthly briefing.

Cars produced by foreign-invested joint ventures dominate the market. While the JVs have proven lucrative for both multinational car companies and their state-owned partners, the latter have failed to develop their own brand products.

The three most popular cars in China are Ford’s Focus and Volkswagen’s Santana and Lavida sedans. Sales of these three models alone exceeded 500,000 units in the first five months of this year. For all of 2013, by contrast, China’s most popular domestic brands, BYD and Chang’an, each sold 500,000 units.

“Continued expansion of the middle-class population is raising the number of potential buyers and foreign brands are building out their distribution networks in lower tier cities,” Mr Russo said. “From a market share perspective there’s no good news for the local brands.”

Even Hebei-based Great Wall Motor, which manufactures China’s best-selling SUV, has recently suffered heavy sales declines in part because of quality issues that have delayed the launch of its latest Haval model.

In an attempt to halt the decline of local brands, CAAM has opposed moves to lift the 50 per cent foreign-ownership cap in China’s auto sector and is urging multinational carmakers to transfer more technology and R&D capabilities to their local joint ventures.

Some foreign car companies have also been criticised for the high prices of their vehicles in China relative to other markets, although they insist this is because of strong demand and import tariffs rather than any anti-competitive practices.

Additional reporting by Wan Li

Click here to read this article at FT.com

China’s carmakers have yet to make their marque

The Financial Times, February 3, 2014

By Tom Mitchell in Wuhan

• 
  Crowded lot: thousands of cars sit outside the Dongfeng-Peugeot Citroen plant in Wuhan awaiting shipment. High production from the joint venture contrasts with Dongfeng’s own plants
• Dongfeng’s Aeolus S30: the Chinese carmaker has four successful joint ventures, but it has struggled with its own branded vehicles. These account for less than 10 per cent of annual sales
  

  
  

Aside from a few Communist Youth League banners and a summary of the reforms unveiled at the Chinese Communist party’s third plenum last November, there is little to distinguish Dongfeng’s wholly-owned Aeolus car plant from its nearby joint venture with Peugeot Citroën and Honda.

Situated in a development zone in Wuhan, an industrial city in central China, the Aeolus factory has borrowed equipment and manufacturing systems from both Peugeot and Nissan, state-owned Dongfeng’s third joint venture partner.

Wheels in motion

Passenger car exports

The parking lots outside each plant, however, tell a different story. While thousands of cars are lined up outside Dongfeng’s Peugeot and Honda factories in Wuhan, awaiting shipment to distributors across the world’s largest car market, its Aeolus factory produces only about 300 vehicles a day, or about 100,000 units annually.

Dongfeng, one of China’s “Big Three” car groups alongside Shanghai Auto and First Auto Works, has more joint ventures with international car groups than any of its domestic peers. Including Korean partner Hyundai, it currently operates four joint ventures and signed a fifth partnership agreement in December with Renault. The Wuhan-based company is also poised to take a 14 per cent stake in Peugeot as part of €3bn capital raising.

Dongfeng’s four joint ventures account for more than 90 per cent of the group’s annual passenger car sales, dwarfing those of its own Aeolus brand. It is an imbalance shared by all of China’s state-owned car companies and helps explain why the country that boasts the world’s biggest car market has, unlike Japan and Korea before it, thus far failed to produce a national champion of its own that can compete globally.

“On the plus side, joint ventures spin off a tremendous amount of profit for the state-owned enterprises that they’re affiliated with,” says Bill Russo of Synergistics, an industry consultancy. “On the negative side, those profits are a drug that you become dependent on. Chinese car companies haven’t really been successful at investing them into their own branded vehicles.”

Last month, the China Association of Automobile Manufacturers announced that the country’s car sales grew more than 15 per cent last year to 18m units – almost triple the number sold in 2008. During this period, the market share of Chinese brands peaked at 31 per cent in 2010 and has since fallen to 27 per cent. Meanwhile, China’s 2013 car exports fell almost 10 per cent year on year to just 596,300 units – accounting for only 3.3 per cent of total production.

Imports, meanwhile, nearly tripled to 1.1m vehicles, driven by strong demand for luxury vehicles. While China exports more cars to Algeria than any other country – with its next biggest markets being Russia, Chile and Iran – the largest source of its own automotive imports is Germany.

“The quality of Chinese cars currently can’t compete with multinationals,” says Yao Jie, deputy secretary-general of the association. “We need to work harder to improve domestic brands.” According to CAAM, last year China’s 10 most popular models, led by the Ford Focus, were all manufactured by Sino-foreign joint ventures.

“Most Chinese state car companies know how to bolt a car together,” agrees Max Warburton, car analyst with Bernstein Research. “But replicating a foreign manufacturing system is not a particularly valuable skill set. Real skills lie in product development and in future technology.”

On a tour of Dongfeng’s Aeolus plant, employees are humble but also determined. “I feel that we can catch up but it will take a long time, perhaps 10 years,” says Huang Mingke, a line manager who gave up a job with Dongfeng’s Peugeot joint venture even though the Aeolus plant generally pays lower wages than the joint ventures. “We are investing a lot in critical components, such as engines and transmissions.”

“Although we have borrowed some advanced management techniques from Peugeot and Nissan, it’s only a foundation on which we are building,” adds Tao Haiying, a company official. “We can study and absorb their best practices as we create our own.”

Many analysts believe Dongfeng and its domestic peers will have to sort out their competitive issues at home before they can emerge as a threat overseas. “Maybe China can do something that no one else has, but I haven’t ever seen a car company become a successful exporter without having stable development in their home market first,” says Mr Russo. “You have to achieve a certain size and scale at home before you can compete away.”

The challenge for China’s car companies will be to achieve this in the world’s most competitive automotive industry. When Japanese and Korean carmakers broke out in the 1970s and 1980s, they did so from the shelter of protected home markets.

Dongfeng’s pending deal with Peugeot and Geely’s acquisition of Sweden’s Volvo in 2010 suggest another way forward. What Chinese car companies lack in experience and technical expertise, they can make up for in cash.

Last year Geely established a research centre in Sweden, while Peugeot offers Dongfeng a tempting short-cut in some key areas. “Peugeot has kept spending through the [global financial] crisis,” notes Mr Warburton at Bernstein Research. “So even though its finances are a mess it does have basic platforms, power trains and transmissions that are fully competitive. Dongfeng doesn’t have any of that.”

Additional reporting by Wan Li

Click here to read this article at FT.com

Lost Year for Toyota Dealer in China Underscores Japan Challenge

Bloomberg Business Week, September 11, 2013

The Toyota Motor Corp. logo is displayed on a vehicle in Beijing, China.

It took Wang Chongwei almost a year to rebuild his Toyota Motor Corp. (7203) dealership in Qingdao, China, after a mob protesting against Japan’s purchase of a group of disputed islands burnt down the showroom.

On opening day one humid Sunday morning last month, more than 100 local residents, some with toddlers in tow, showed up to play funfair games and watch svelte dancers performing South Korean pop star Psy’s new hit single “Gentleman.” That’s a stark contrast to the demonstrators last year, who also torched Wang’s other dealership by Honda Motor Co. (7267)

“I’m a patriot just like any other Chinese, but politics should be politics and business should be business,” Wang said in an interview at the showroom’s reopening. “Last year’s incident is unique and I don’t want to talk about it any more. I am fully confident in future sales.”

Wang said he’s targeting to sell the same number of cars at the reopened dealership -- about 100 cars a month -- illustrating how Japanese automakers are working to return to last year’s sales levels even as the likes of Ford Motor Co. and Hyundai Motor Co. pull ahead.

Intermittent bouts of tensions between Asia’s two largest economies also underscore the risks of a prolonged consumer backlash against Japanese auto brands, which have lost a fifth of their market share in the past year. Winning back the lost ground will involve increasing incentives that will pressure margins, according to consultancy Synergistics Ltd.

“Even if the Japanese recover, they will do so at great expense,” said Bill Russo, Beijing-based president of Synergistics. “That’s really going to affect their investment in this market going forward. They have to think where else in the world they can have profitable growth if they can’t get it in China.”

Disputed Islands

Nationwide protests erupted across China last September after Japan moved to purchase a group of disputed islands -- known as Senkaku in Japan and Diaoyu in China -- from their private owner one year ago yesterday.

Thousands of Japanese cars were vandalized and businesses attacked by mobs in the demonstrations. The ensuing consumer backlash sent Toyota and Honda to their first annual sales declines on record in the world’s largest vehicle market.

The dispute hasn’t blown over. Japan lodged a diplomatic protest to China after eight Chinese Coast Guard ships entered Japan-controlled waters on Sept. 10 near the island chain being claimed by both nations.

Sales Slump

According to Nissan Motor Co. (7201), the biggest Japanese carmaker in China by volume, its sales are down more than 6 percent in the country during the first eight months of this year, even as industrywide passenger-vehicle sales increased.

Toyota’s deliveries have declined 5.3 percent in the same period, while Honda slid 2.9 percent.

“In China, there are several issues, ranging from the political situation between the two countries, the slowdown of the Chinese economy and the products we sell in the market,” Toyota Executive Vice President Nobuyori Kodaira said Aug. 21. “Our aim is to carefully respond to what our Chinese customers want and to raise our efforts in meeting those needs.”

Toyota passed on Shanghai and Beijing and chose Dubai for one of its three new global Intersect by Lexus boutique stores, a key effort by the automaker to promote its upscale brand outside its biggest market of the U.S.

Asked whether the anti-Japanese sentiment played a part in that decision, Mark Templin, the brand’s vice president, said last month in an interview that the company wanted to be careful about the pace of expansion in China.

Slow Recovery

Honda said the political issue won’t affect its long-term plans in China and the automaker expects sales this year to surpass last year, according to Beijing-based spokeswoman Natsuno Asanuma. Nissan’s sales in China haven’t fully recovered, though it’s on track to achieve its plan this year, said Yoshiko Tsumagari, a spokeswoman for the Yokohama, Japan-based company.

Ford Motor Co., unencumbered by geopolitical baggage, has emerged as the biggest winner, benefiting from consumers seeking non-Japanese options and an expanded lineup of new models.

Deliveries at the Dearborn, Michigan-based automaker have jumped 50 percent in the first eight months of this year, driven by sales of its Focus compact and Kuga and EcoSport SUVs. The second-largest U.S. automaker last month introduced a revamped Mondeo mid-sized sedan aimed at Toyota’s Camry, Nissan’s Teana and Honda’s Accord.

Ford Benefits

“Ford’s success is due to their new product launches which suit the market well, but also because of the fall of the Japanese,” said Zhu Bin, an analyst with LMC Automotive in Shanghai. “They have many models that directly compete with the stronghold of the Japanese, such as the Mondeo sedan, Focus compact and Kuga SUV.”

General Motors Co. (GM:US) and Volkswagen AG (VOW) are also stepping up investments in China as both automakers forecast their sales will climb to 3 million vehicles in the country this year.

GM will invest $11 billion in China by 2016 and add four plants by 2015 that will boost capacity to about 5 million units. VW said in March that it will add seven car plants in the country, bringing the total to 19, and increase production capacity there to 4 million vehicles a year by 2018 from about 2.5 million currently.

Despite the headwinds, China remains too big a market to ignore and Japanese automakers should play to their strengths in fuel economy to win back customers, said Satoru Takada, an auto analyst at Toward the Infinite World Inc. in Tokyo.

Fuel Economy

That would mean wooing consumers like real-estate agent Lei Zhucheng, 43, who says tensions between the two countries aren’t a factor in his purchase decision.

“I look at the car’s quality rather than politics,” said Lei, who was checking out the Honda Jade wagon at the Chengdu auto show last month. “Honda cars are fuel-efficient. Their prices are reasonable and it’s good value.”

Back in Qingdao, Diao Zihui, marketing manager of the rebuilt Toyota dealership, said she wants to put the past behind her. The staff worked out of makeshift premises for months while the showroom was being rebuilt.

“It’s like a nightmare I hate to recall,” said Diao. “I shed a lot of tears. I hope this won’t repeat and China and Japan can be friendly.”

To contact the reporter on this story: Ma Jie in Tokyo at jma124@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

Click here to read the article at www.businessweek.com

压力重重通用汽车计划转移韩国产能_财经频道_一财网

China Business News, August 16, 2013

在韩国汽车市场销售的汽车品牌主要来自于韩国国内的厂商，比如现代起亚集团。进口税以及本土化率低导致海外汽车品牌很难和现代-起亚品牌竞争。

王含（化名）是一名汽车专业的大三学生，非常迷恋韩国电视剧和电影，但是她发现，出现在韩剧里面的车子不是现代汽车的就是起亚汽车的，极少看到通用汽车、大众汽车等人们耳熟能详的汽车品牌。

王含发现，与中国和美国市场的开放性相比，韩国汽车市场基本上是个封闭性的汽车市场，外来的汽车品牌很难在韩国市场生存。

“在韩国汽车市场销售的汽车品牌主要来自于韩国国内的厂商，比如现代起亚集团。进口税以及本土化率低导致海外汽车品牌很难和现代-起亚品牌竞争。”克莱斯勒东北亚前副总裁、香港协同共进有限公司总裁罗威告诉《第一财经日报》记者。

韩国国内市场的封闭性正在间接逼迫海外品牌撤出韩国市场：通用汽车不断释放退出韩国市场的信号；与之相似的是，之前的7月，日本三菱汽车对外发布消息称，由于该公司在韩国的汽车销售行情不佳，将停止在韩国的销售活动，撤离韩国市场。

多重压力

日前，海外媒体报道，考虑到劳动力成本提升以及工会强势等多方因素，通用汽车正计划退出韩国市场。其实，在多重压力之下，通用汽车从去年开始就不断传递其削减在韩国市场业务的信号。

去年，通用汽车旗下欧宝宣布，将从2014年下半年开始将韩国工厂Mokka车型的部分产能转移至西班牙。

除了Mokka外，通用汽车还宣布，有可能放弃在韩国工厂投产下一代雪佛兰爱唯欧，并将其生产业务交由中国及美国工厂。

转移新车生产基地的一方面原因来自韩国工会强势的文化带来的生产不确定性。通用汽车因为在韩国劳资纠纷等因素对当地制造的兴趣减淡，激进的工会文化和不断攀升的劳动力成本让通用汽车开始重新思考其对韩国市场的业务依赖。通用汽车在韩国市场不断遭遇罢工，去年7月至9月期间，通用韩国公司遭遇了该公司2002年成立以来规模最大的罢工，罢工导致该公司减产4.8万辆汽车。

通用汽车高层对上述媒体表示，需要确保能够将韩国市场上面临的业务风险转移，不仅仅是在未来2~3年，而是在未来很长一段时间，不要再对韩国市场的业务表现出极高的依赖。

过去10年里，韩国市场上的劳动力成本大幅攀升，从而使得韩国市场上的汽车生产成本提升，如果汽车企业再没有规模化优势，其就缺乏竞争力。OECD（经合组织）数据显示，截至2009年的10年时间内，韩国制造业的人均总劳动力薪酬跳涨了119%，高于美国40%和欧元区27%的上涨速度。

除了劳动力成本提升，在过去的一年里，韩元汇率的走强也在一定程度上降低了通用汽车从韩国市场出口的竞争优势，毕竟，通用汽车在韩国5个工厂生产的80%的车型都是出口至海外其他市场。同时，韩国本土汽车市场这两年也不景气，去年韩国国内销量为140万辆左右，下滑4.2%。

封闭市场

韩国市场不仅容量小，同时，也是一个相对封闭的市场，海外汽车品牌在韩国市场不具备竞争优势。

2002年，通用汽车收购韩国大宇汽车以进入韩国市场并获得大宇小型车技术,现在韩国市场已经成为通用汽车重要的出口基地和研发中心。罗威分析认为，大宇作为通用汽车的合作伙伴来说，帮助通用汽车提升了小型车技术，将生产的小型车出口到中国等其他市场。但是，在韩国本土市场，与现代-起亚集团相比，大宇公司并不能给合作伙伴通用汽车带来规模化上的竞争优势。

2012年，韩国5家汽车整车生产企业全球销量共计819万辆，其中出口销量为679万辆，国内销售为140万辆。在韩国国内市场上，现代-起亚市场占有率接近八成，其中现代汽车占42.89%，起亚汽车33.78%，其他份额主要来自通用大宇、双龙，雷诺三星等在韩国本土生产的汽车品牌，进口车奔驰和宝马所占的市场份额微乎其微。

多年来，韩国本土汽车厂商始终保持了以上的竞争格局，其他汽车制造商并未在韩国取得突破性优势，现代-起亚品牌在更早的时期在国内市场占有率曾超过90%。由于不具备规模化优势，海外汽车品牌就很难与现代-起亚竞争。

造成韩国汽车品牌为主导的汽车市场存在多方面原因，其中一个重要的原因是韩国政府对本土品牌的支持，韩国政府通过高关税将外国制造商拒之门外。

韩国政府在1962年制定的《汽车工业保护法》大幅度提高了进口汽车关税，直到1985年韩国汽车工业基本成熟后，才在其他国家的压力下开始逐步降低。1987年进口关税降低到50%，1989年降到25%，到1995年降到8%左右就基本保持稳定，不过即使关税一再降低，进口车仍然在韩国难以有大幅度增长。韩国方面还对汽车进口商推出非关税壁垒措施，比如限制建立进口汽车销售网络；禁止在电视和报刊上做广告；对购买外国高级汽车的顾客进行特别税务检查；政府推行反奢侈和“买韩国货”运动等。

“拥有民族品牌的汽车”是韩国汽车工业规划的重要目标、汽车工业发展的重要标志。他们在较短的期限内有一个非常明确的目标：KD组装—引进技术，提高国产化—国内自主生产，自主开发车型—促进大企业成为骨干企业集团，参与海外竞争—拓展海外市场。

“韩系汽车制造商包括现代及起亚占据充分的本土优势,在上世纪90年代异军突起，在主要竞争领域比如价格、车型、性能、油耗等方面都提供了丰富的、足可以媲美全球竞争对手的产品。当然在韩国汽车起步时期，韩国政府对于本土汽车厂商的倾斜政策也确保了韩系制造商成为市场上的强者。” 普华永道大中华地区汽车行业主管合伙人廖仲敏告诉记者。


(编辑:付筱婧)

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Bill Russo to Discuss Outlook for Chinese Auto Market and Luxury Brands at Investor Conference Call

Investor Conference Call, August 21, 2013

Wednesday, August 21, 2013, 10:00 AM EDT

Expert:  
William Russo
Founder and President, Synergistics Ltd.

Wed, 8/21 at 10 a.m. EDT 
REGISTER 
Replay available upon request.

EXPERT INSIGHTS ON:

• Five year growth outlook for China’s premium car segment
• Big three German OEMs vs. smaller players
• Demand drivers and adoption rates for SUVs and sports sedans
• Premium car buyer spending patterns, customer loyalty and opportunities for new brands
• Market segmentation from eastern to western provinces and from large to small tier cities
• Companies: Ford (F), General Motors (GM), Volkswagen (VOW), Toyota (TM),Honda (HMC), Chrysler, Nissan (NSANY), Hyundai (HYMTF), Daimler AG(DDAIF), BMW AG (BMW)

The Chinese auto market has passed a key inflection point, downshifting to a more sustainable growth pattern in-line with GDP. Competition is intense among the foreign and domestic vehicle OEMs as they adjust to the slower environment and attempt to stay profitable. While structural challenges will likely result in negative pricing and margin pressures, certain segments will continue to drive profitability, including luxury cars and SUVs. It remains to be seen if automakers and their partners can understand and anticipate these developments and implement strategies to diversify revenue streams.

ABOUT OUR EXPERT:

Bill Russo is President of Synergistics, Ltd, a consulting firm to the auto market and he has more than 25 years of experience in the industry. Prior to Synergistics he was VP of Chrysler Northeast Asia, where he successfully negotiated and secured government approval for six vehicle programs with three different Asian partners. In this time period, he launched a regional holding company as well as two distribution companies and oversaw the industrialization of the first Chrysler and Dodge-branded vehicles in Asia. He holds a U.S. patent for his innovative efforts towards reducing automotive new product development cycle time and is a published author and opinion leader whose viewpoints have appeared throughout several media outlets.

OUR ANALYST:  
Michael Cohen         Director, Consumer Research 

Amaze works wonders for Honda's brand makeover, more launches lined up

The Economic Times of India, June 16, 2013

Hironori Kanayama, President of Honda Cars India, Ltd.

The plush showroom in Noida is abuzz. Monthly footfalls have surged from 200 early this year to about 500. From worrying about poor sales, the dealer is now grappling with a three-month-long waiting list. Business hours are often extended and not just at the Noida dealership to manage the customer surge.

It wasn't always this way for Honda Cars India Ltd (HCIL). A slew of missteps from mispricing premium hatchback Jazz, to ignoring the mass market and, subsequently the diesel segment when the price differential with petrol widened coupled with a few natural calamities elsewhere like an earthquake in Japan and floods in Thailand hit HCIL hard. Between fiscal years 2007 and 2013, market share steadily dropped from a peak of 4.44% to a low of 2.74%. Volkswagen's Vento and Hyundai's Verna eroded Honda's leadership position in sedans, where the City once ruled the roost; and models like the Hyundai Elantra and Toyota Camry began giving Honda's Civic and Accord a run for their money in the executive sedan and premium sedan segments, respectively.

"Honda was an aspirational brand, rich in features and looks. But it also came across as an overpriced and highly decontented [industry terminology for removal of features] vehicle," says V Ramakrishnan, managing director at Frost & Sullivan India, a consultancy firm. The short point: Honda wasn't getting anything right: neither product, nor price nor positioning.

It required just one launch to turn things around. The Amaze, launched just two months ago, has helped HCIL, according to SIAM, jump one place to No. 5 in May, ending the month with a share of 5.63% of the Indian car market. With total sales of 11,342, HCIL's sales grew 9.8% in May over a year ago in a sluggish market where competitors like Maruti (decline of 13%), Toyota (decline of 35%) felt the brunt.

"This is our counterattack. Amaze is our first weapon. We have many more," says HCIL CEO Hironori Kanayama. Adds Jnaneshwar Sen, senior V-P (sales & marketing): "We have managed to hit the sweet spot."

It may be just one model that has reversed HCIL's fortunes, but to create that winning product called for a complete overhaul of the company's DNA an exercise that began two years ago.

Thinking Frugal

Honda's biggest challenge was to learn new and cheaper ways to develop and produce cars in India. Earlier, Honda developed global models and then tried to localise for each new market. For the Amaze, inputs from India began trickling in right from the beginning of the R&D process.

Between the Brio hatchback launched in 2011 and the Amaze, HCIL worked aggressively to contain costs by developing local vendors without compromising on quality.

From 102 vendors at the pre-Brio stage, HCIL's vendor base has now grown to over 200 (the majority of them non-Japanese), helping Honda achieve 92% localisation. Aditya Auto is one of HCIL's newer vendors, which began working with the carmaker three years ago. HCIL was looking for a cost-efficient way to produce window regulator systems in India that met its quality parameters. It had traditionally used a wire type rope mechanism that was imported from Thailand but was costly.

"Honda gave us targets and asked us to give them solutions. We fundamentally changed the design of the window regulator," says Mihir Jayaraman, the vendor's business unit head. In the process, Jayaraman also brought the cost down by 35%. The decade old vendor, which has annual revenues of Rs 250 crore, now also supplies to Honda Thailand.

City vs Amaze Buyers

HCIL also reworked its branding and marketing strategy. It began by first understanding how the Amaze buyers would be different from say a City buyer. The latter is typically a well-todo discerning customer who enjoys the finer aspects of life, for whom brand is important, who is a trendsetter (and hence experimental) and has reached a certain status hence takes certain things for granted.

The Amaze buyers, HCIL reckoned, would be more conservative, seeking products that offer peace of mind; that meant not just an affordable price tag but also a reasonable cost of ownership. For them, status, comfort and safety are important. Also, more Amaze owners would tend to drive their cars than City owners; and more of them would be in Tier II cities.

That's one big reason for HCIL expanding in smaller cities from 150 outlets in 90 cities to 162 in 102 by the end of this fiscal year. Alongside, the showrooms, which have always been plush and spacious with plenty of glass and chrome are getting an informal touch. Now salesmen in T-shirts add a touch of warmth and casualness to the customer care experience. "We learnt a lot from the Brio. We want customers to get the Honda brand experience with a more warm and approachable feel," says Sen.

In an attempt to change the traditional customer base from chauffeur-driven to ownerdriven, HCIL has spruced up the owners' lounge at its service centres by enlarging it and adding more facilities like PCs, TVs, and snacks and coffee counters.

To change the perception that Honda is an expensive brand and only for sophisticated (City) customers, HCIL has introduced a Rs 9,996 maintenance package for up to two years or 40,000 km. "The Amaze compares well with the Dzire on maintenance costs," adds Sen.

Brand Makeover

Honda also rejigged its advertising and marketing strategy. "Honda had a very inward-looking mentality," says an advertising executive who has worked on the Honda brand for close to five years. The decisions were largely driven by Japanese expats whose understanding of India and Indians was often poor. "Its ad campaigns were very English, very conservative, very print-driven and often did not realise the power of TV in India," adds the adman who did not want to be named.

Traditionally, Honda believed that technology lay under the bonnet and hence stressed on engineering excellence. "But the Koreans changed the game from being what's under the bonnet to equally about what's on the dashboard. But Honda was cussed, stubborn about it," recalls the executive. It would show more car angles than consumer benefits. So the brand became inaccessible even as other companies like VW came and created a marketing buzz.

"The reins are now with the Indians. I haven't met the Japanese even once," says an ad executive working on the Amaze account. HCIL's typical ads were high on gloss, with brochures and designs that were very European with skyscrapers in the backdrop. Even the Brio campaign "It loves you back" was for an English speaking audience.

In contrast, the Amaze campaigns showcase a slice of a regular Indian's life, with kite flying, Holi colours and India Gate thrown in. And they're now TV-driven. The ad film was shot in two settings — one in the north and the other in the south and has been dubbed in 14 Indian languages to cater to a very heterogeneous market. The objective clearly was to have an imagery similar to that of Maruti's advertising. "Their campaigns suggest they have got the insight right. They have become a friendlier brand," says Naresh Gupta, managing partner, Bang in the Middle, a boutique advertising firm. Gupta, an ex-Dentsu executive, had worked on the Honda account earlier.

The Global View

HCIL's newfound drive in India ties in with its global ambitions. By 2017, Honda is looking at sales volumes of 6 million cars with emerging markets bringing in half of them.

Getting the India act together is an imperative particularly when Honda is struggling in the other emerging market that matters, China, where its market share has slipped from 5.5% in 2008 to 3.2%. "Honda made a strategic misstep in China in 2008 mainly by scaling back its expansion plan after the financial crisis; it was illprepared for the soaring demand in China that followed post-2008," says Bill Russo, a senior adviser at consultancy Booz & Co.

Back in India, it is still early days, but HCIL will take heart from one statistic: some 88% of the customers who visited Honda showrooms to check out the Amaze had never owned a Honda car. "The Amaze is bringing a lot of new customers into the Honda fold. It is a great source of future business for us," says Sen. And roughly a third of Amaze customers are from Tier II cities.

What has always been HCIL's trump card is that those who bought Honda cars had few problems with them. In the JD Power rankings on parameters like customer satisfaction and product quality, it's always been ranked amongst the top 2.

"Honda may not have the sales but it always enjoyed great equity among Indian consumers," says Mohit Arora, executive director, JD Power Asia Pacific. "Now, with new models they are fixing their biggest problem of the right product-price equation. Maruti should be seriously worried," he adds.

Subhabrata Ghosh, CEO, Celsius 100, a consulting firm focussed on the auto sector, says the task of moving down the price spectrum is easier than going bottom-up. "Honda is a socially aspirational and emotionally satisfying brand. It is not very difficult for a brand like that to come down a step below and become accessible to a broader set of customers." In contrast, Maruti has found it tougher to move from the mass market into more exclusive segments.

There will be new challenges along the way. For instance, the new set of customers will use their cars more conservatively than Honda's earlier buyers of the more premium cars; Amaze buyers will look for a replacement only after 5-7 years as against the more affluent City customer who will typically buy a new car after 3-5 years, says Ghosh. At the same time, with more customers coming from smaller cities, where road conditions may not be the best, there could be compromises on preventive maintenance.

Even as HCIL succeeds in expanding its customer base, its famed attributes of maintaining quality and reliability will be tested like never before. The Makeover...

More launches
After the Amaze and a diesel engine, new launches include an MPV, SUV and diesel variants by 2015

More investments

Rs 2,500 crore to double manufacturing capacity to 2.4 lakh by 2014

More local vendors
Vendor base is up from 102 in the pre-Brio phase to 200-plus now to boost localisation and control costs

Sharper India thrust
Y Matsumoto, in charge of development, production (Asia, Oceania) drafted to India to beef up local expertise

Sharper brand message
From English ad campaigns, ads now have an Indian touch and are in seven local languages; dealers & customer care have been re-jigged accordingly

Sharper dealer connect
From a decentralised set up, a new software now connects all dealers giving Honda real-time customer & complaints data

Savvier service
Owners' lounge at service centres being spruced up to cater to new buyers



CEO Speaks On Honda India's biggest challenge: We are weak on our cost competitiveness. We are improving it but we need to work on it harder.

On market share: Our target is not just to become big in India or grow our market share. We want to be the most trusted company. We want to expand our universe in India but also maintain and further increase our quality and customer care.

On Honda India and its global relevance: India is a very unique market, very different than even other emerging markets. Half the market here is of hatchbacks. I am not sure how transportable to other markets are the lessons we learn here. We do not have big export plans - not more than 10%.

On his management style: I have my food in the plant canteen. I queue up and often have Indian food. My rationale is if my people are looking left, I cannot look right. That is wrong. It creates hurdles. I have to be part of them. We need to move in the same direction. I often do direct meetings with people below to get their views.

On his toughest challenge: When I went to Honda China, quality, sales and service was a huge concern in 1998. We used to import Accords then. By the time I left we were exporting cars to Europe. Our quality there became world-class.

Click here to read the article at The Economic Times of India

Ferrari-Beating Great Wall Shows Wei Forging Next Hyundai

Bloomberg News, July 4, 2013

Wei Jianjun, chairman of Great Wall Motor Co., has become Asia’s wealthiest car executive, with an estimated fortune of $6.6 billion as he strives to create China’s first global automotive brand.

Wang Jiangwei recalls spending last summer sweating through a month of military drills conducted by Chinese People’s Liberation Army instructors. Wang isn’t a soldier; he’s a researcher at Great Wall Motor Co. 

His Baoding, China-based employer is so profitable, it generates a fatter margin than any listed carmaker in the world. Behind the success is Chairman Wei Jianjun, who has built China’s biggest SUV maker with a leadership style that stands out for its emphasis on discipline and frugality.

“The military training is pretty serious and tough,” said Wang. “Not only new hires but people who get promoted, even those becoming department heads, need to redo training.”

Great Wall represents a rare breed of Chinese automakers independent of foreign partners and government, sparing it from having to split profits and endure extra bureaucracy. With the stock surging more than 60-fold (2333) since its 2008 low, Wei has become Asia’s wealthiest car executive, with a fortune of $6.5 billion as he strives to create China’s first global automotive brand.

“Wei is a real professional, a real entrepreneur,” said Bill Russo, formerly vice president of Chrysler Northeast Asia and now president of automotive consultant Synergistics Ltd. in Beijing. “If there’s one or two automakers able to survive all the competition with foreign rivals in the next decades or so, Great Wall will definitely be one of them.”

Next Hyundai

Great Wall could become the next Hyundai Motor Co (005380)., the Seoul, South Korea-based automaker, he said.

The stock rose 6.2 percent to close at HK$34.25 in Hong Kong today after Janet Lewis, a Hong Kong-based analyst at Macquarie Group Ltd., raised her 12 month target price by 37 percent to HK$45.30.

Wei, who’s $1 billion wealthier than Hyundai Chairman Chung Mong Koo on the Bloomberg Billionaires Index, has signaled Great Wall will eventually outsell Chrysler’s Jeep globally and is targeting sales to double over three years to 1.3 million vehicles by 2015.

Though lagging behind major automakers in scale, low costs help its operating margin beat everyone -- even Fiat SpA (F)’s Ferrari. It will probably top the industry this year at 16.4 percent, according to Max Warburton, an analyst at Sanford C. Bernstein.

Asbestos Recall

Chinese automakers are a decade away from delivering their first globally competitive vehicle, though that’s only one or two product cycles in the auto industry, Warburton said. He hired specialists to tear apart and test a Great Wall H5 for a report in February and found the SUV’s gearbox had “truly awful” vibrations and braking was poor, though it drove well. Despite the H5’s shortfalls, it made a “massive leap forward” in quality with the newer H6, he wrote.

While the company has had its share of growing pains -- it recalled thousands of vehicles in Australia last year after regulators found asbestos in parts -- Wei said Great Wall’s ability to develop technology will determine its future.

“We have to own core technologies and make breakthroughs,” Wei said in an interview during a plant tour on May 31. “The biggest risk we’re facing is possible complacency.”

Net income will probably rise 24 percent to 7 billion yuan ($1.1 billion) this year after surging 66 percent in 2012, according to the average of 16 analyst estimates compiled by Bloomberg.

Wei, born in Baoding in 1964, said he was greatly influenced by his father, an artillery soldier who ventured out on his own to make boilers.

Great Deer

After several factory jobs, Wei branched out. At 26, he took over a small car-modification business and turned it into a van maker. He later shifted focus to pickup trucks after witnessing their popularity in Thailand. Small business owners and farmers turned Great Wall’s Deer into China’s most popular pickup brand by 1998.

Then anti-pollution laws restricted trucks in major cities, prompting Wei to switch to SUVs. Today, the company relies on SUVs for almost half its sales and is poised to lead the nation’s crowded SUV market, the fastest growing segment of China’s auto industry, for an 11th year.

The billionaire also knows when to wait, said Russo, recalling when Wei visited Chrysler LLC’s headquarters in 2008. Asked by Tom LaSorda, then CEO of the Auburn Hills, Michigan-based company, why Great Wall didn’t join Chinese carmakers in showcasing vehicles at the Detroit auto show, Wei replied they weren’t ready, Russo said.

“They don’t try to overreach,” he said.

’Boulders of Shame’

As Great Wall grew, Wei recruited Wang Fengying, 43, his top sales chief for the past two decades, who says she doesn’t shy away from telling her boss that he’s wrong.

“We argue all the time,” Wang said in an interview. “Our goals are the same, so we can always find common ground.”

Wang said five years ago she opposed the rollout of a Gwperi endorsed by Wei, who overruled her, only to see the subcompact flop. The debacle is engraved in red at Great Wall’s two “Boulders of Shame,” where one lists major failures in product development and the other identifies officials who have been jailed for accepting bribes from suppliers.

Donkey Burgers

Wei has more eccentricities, according to Zhang Yun, who has advised him for five years on strategy. The billionaire is so frugal he smokes 10 yuan-a-pack Zhongnanhai cigarettes and once scolded a group of dealers for leaving too much food on the table after a meal, Zhang said. He sleeps most nights in a room connected to his office and starts work at 7 a.m. in a gray uniform, Zhang said.

Then there’s the discipline.

In Baoding, famous for donkey burgers and home to the oldest military academy in modern Chinese history, Great Wall makes recruits endure foot drills and push-ups. The idea is for them to build endurance, increase willpower and understand the corporate culture, according its website.

“I have gone to other factories in China and when it’s time for lunch, everybody runs to the cafeteria at the same time,” said Russo. “They don’t do that at Great Wall.”

Click here to read the article at Bloomberg News