Toyota Isn't in Tune With China's Needs: Russo

Bloomberg Television, January 22, 2015

Gao Feng's Managing Director Bill Russo discusses China's car market snd why the country is so important for automakers with Bloomberg's Rishat Salamat on "On The Move".

http://www.bloomberg.com/news/videos/2015-01-22/toyota-isn-t-in-tune-with-china-s-needs-russo

China green-car makers see hope in subsidy revamp

The Wall Street Journal Market Watch, June 8, 2014

By Joanne Chiu

Despite being based in one of the world's biggest and most polluted car markets, Chinese electric-car maker BYD Co. until recently sold few of its hybrid or battery-powered electric cars outside of its home province of Guangdong, thanks to a system of local subsidies.

Those rules are now changing under a new effort by China's central government to push local authorities to treat equally all Chinese car makers when granting green subsidies. This year for the first time, big cities are relaxing subsidy rules that effectively prevented sales of electric and hybrid cars by local manufacturers that weren't based in their jurisdictions.

Such restrictions had been a drag on green-car sales in China, particularly for BYD, a midsize manufacturer of cars, buses and batteries. In 2008, BYD became the first Chinese auto maker to produce electric cars, a move that helped attract a $232 million investment from Warren Buffett's Berkshire Hathaway Inc.

This year "is an inflection point for China's electric-car industry," Li Yunfei, BYD's domestic sales executive, said in an interview. "We expect China's electric car sales will continue to record strong growth rates in the next few years," he said, without providing details.

BYD in March said it hoped to sell 20,000 electric vehicles in 2014, a big increase from some 2,000 sold last year. Mr. Li said sales in Beijing and Shanghai, one of the first cities to loosen regulations, have already helped push sales of BYD plug-in hybrid passenger cars to 3,294 in the first four months of this year, with 8,000 more on order. Plug-in hybrids are cars that can run on either gasoline or battery-power.

BYD's change of tone reflects a broader policy shift in China, as the country's leaders make a renewed push to stimulate demand for green cars in a bid to combat pollution and curb rising oil dependence. The nation has set for itself the ambitious goal of putting 500,000 plug-in hybrid and electric vehicles on the road by next year, and five million by 2020.

One example of the shift is the central government's recent push to have provincial governments extend subsidies for electric and hybrid cars to makers based outside, as well as inside, their regions. Such subsidies are vital because they make pricey green-cars affordable. When combined with national subsidies, they can cover around one-third of the cost of a car. BYD's flagship e6 electric car sells for around 380,000 yuan ($60,800) without subsidies. Foreign electric-car makers have limited benefits: Shanghai, for instance, pledged to offer 3,000 license plates free to buyers of imported electric vehicles.      

                                    

The governments of Beijing and Shanghai started offering subsidies for BYD green cars in recent months, and other major cities are expected to follow suit later this year. Other cities plan to build charging stations so electric car owners won't worry about being stranded away from home.

Plenty of hurdles remain. BYD's Qin hybrid car gets 70 kilometers, or 43 miles, on a single charge compared with 121 kilometers, or 75 miles, in a Nissan Leaf. BYD also is still heavily dependent on sales of traditional gasoline cars, and those are declining as more Chinese consumers flee to higher-quality foreign brands. BYD's first-quarter net profit plunged nearly 90% versus the previous period, to 12 million yuan.

At the Chongqing auto show on Friday, hundreds of would-be car buyers milled around the stands of foreign auto makers such as Volkswagen AG, while visitors to BYD's stand were noticeably fewer.

"How do you finance all these new technologies when you're not making money in your core business right now?" wonders Janet Lewis, an analyst at brokerage Macquarie Group who estimates that electric and hybrid cars accounted for only 3% of BYD's car shipments in the first four months this year.

The charging infrastructure for electric cars remains minimal in China, discouraging buyers. Once green-car demand does pick up, the chief beneficiaries may be foreign manufacturers like Nissan Motor Co., which have more-established electric-car businesses. Nissan later this year will produce electric vehicles for the Chinese market through a joint venture with Wuhan-based Dongfeng Motor Group, making it eligible for local subsidies as well. BMW AG and Tesla Motors Inc. also are making a green-car push in China.

"BYD isn't as well established a brand as a manufacturer like Nissan," said Bill Russo, president of Synergistics Ltd., an automotive-focused consultancy. "It will take BYD time to create trust in the marketplace to allow them to sell in significant numbers.

Mr. Li shrugged off potential competition, saying moves by others to ramp up electric-car sales in China will boost interest in green-cars overall. "It isn't a time to compete with each other," he said. "It's a time to develop a bigger market and create economies of scale."

Mike Ramsey contributed to this article.

Write to Joanne Chiu at joanne.chiu@wsj.com and Colum Murphy at colum.murphy@wsj.com

Click here to read the original article at marketwatch.com

Peugeot agrees main terms of tie-up with China’s Dongfeng

The Financial Times, December 11, 2013

• 1810: The Peugeot family business begins to put down its engineering roots as brothers Jean-Pierre Peugeot II and Jean-Frédéric turn their father’s grain mill into a steel foundry, making everything from coffee grinders to umbrella frames
• 1882: The company turns to transport, making bicycles. The first was Armand Peugeot’s ‘Le Grand Bi’, or penny farthing bike
• 1893: The Peugeot Type 5, which was powered by a two-horsepower engine, was produced from 1893 to 1896
• 1913: The Peugeot 153, whose 2.6-litre, four-cylinder engine produced 12 horsepower, was made in various forms until 1925
• 1929: Peugeot unveils its first mass-produced car, the 201, but sales were are hit by the Depression
• 1934: The top-of-the-range Peugeot 601 rolled off production lines in 1934
• 1940: After the Peugeot 402, produced from 1935 to 1942, the company is forced to build cars and weapons for the German war effort
• 1962: The stylish Peugeot 404 cabriolet became a 1960s icon
• 2010: Peugeot starts production of the fully electric iOn city car
• Today: Robert Peugeot is chairman of FFP, an investment company through which the Peugeot family controls a 25 per cent stake in the car company ©Reuters

PSA Peugeot Citroën and China’s state-owned carmaker Dongfeng Motor have agreed the main terms of an industrial and commercial partnership that will include a large capital injection into the French group in return for technology sharing.

The two carmakers are still hammering out the details but the agreement is expected to involve a €3bn-€4bn capital raising by Peugeot and an agreement for the two groups jointly to develop and produce low-cost small cars for southeast Asian markets.

Peugeot hopes to be able to have the deal announced in the first quarter of next year, according to two people briefed on the discussions.

The French group is desperate to lower its over-dependence on the moribund European car market and is rapidly burning through its capital reserves. Both Peugeot and Dongfeng declined to comment.

Peugeot closed down the first large car factory in France for 30 years this year and reduced its workforce as it seeks to reduce the €3bn cash burn it suffered in the full year 2012. It recently hired a former Renault executive to lead a more globalised push.

The company already has a successful joint venture with Dongfeng building cars in China, but trails rivals such as Fiat and Volkswagen in markets such as South America, and Renault-Nissan in tapping growth in southeast Asian markets.

Carmakers have increasingly turned to alliances and joint ventures to increase their scale and cost efficiencies, but a deal between Peugeot and General Motors to share some products and suppliers has failed to live up to the French carmaker’s hopes.

There are expected to be 5.5m cars and light vehicles sold in southeast Asia this year, roughly half the size of western Europe. But the region’s market is expected to grow by more than half by the end of the decade, versus flat or marginal growth in Europe.

Negotiations are continuing between Dongfeng and Peugeot about exactly how much the Chinese group will pay for what percentage of Peugeot.

The people briefed on the discussions, who declined to be named as the talks were private, added that it could still all fall apart, although this was looking less and less likely.

The French state is contemplating matching any investment made by the Chinese group to maintain French influence over the company.

The most likely investment by Dongfeng and the French state would give the Chinese carmaker and Paris 17.6 per cent each, according to research by Macquarie, with the Peugeot family holding 16.5 per cent and GM 4.5 per cent.

An injection of that size would result in the Peugeot family losing control of the business it founded in 1882.

Based in Wuhan, in central China, Dongfeng is one of China’s largest car manufacturers with annual revenues of $63bn. It already operates a manufacturing joint venture with Peugeot alongside three others – Honda, Kia and Nissan – and last week signed a fifth joint venture agreement with Peugeot’s French rival Renault.

If completed and approved by Beijing, Dongfeng’s tie-up with Peugeot could catapult it on to the global stage – something that no Chinese state-owned carmaker has yet been able to achieve. Hangzhou-based Geely, which purchased Volvo Cars from Ford in 2010, is privately owned.

“Whatever they pay for the shareholding, they’re probably going to get justification in knowhow,” said Bill Russo, a Beijing-based automotive consultant. “Peugeot’s global distribution capacity would also be an advantage for Dongfeng.”

Peugeot accounts for 60 per cent of France’s car production and employs close to 100,000 people locally.

Additional reporting by Tom Mitchell in Beijing

China Looks to Global EVs for Its Local Electric Compliance Cars

PlugInCars.com, November 27, 2013

By Alysha Webb 

It's a Nissan LEAF, but re-badged with the Chinese Venucia brand.

Familiar-looking plug-in electric vehicles may be seen on roads in China in the next few years. Among the vehicles on display at the recent Guangzhou Auto Show in southern China were a Chinese version of the Nissan LEAF and an electric version of the BMW X1. Both were produced via the foreign automakers’ joint ventures in China. Also the latest iteration of the Denza pure electric vehicle, produced at the Daimler-BYD joint venture, was on display.

Does this mean foreign automakers believe China will be a hotbed for electric vehicle sales? Probably not. These vehicles are more likely “compliance cars,” produced to please the Chinese government, which is promoting vehicle electrification in China. Producing the cars domestically through a joint venture will qualify the vehicles for government subsidies.

“It seems the strategy in play is to leverage the JV brand mandate to add foreign EV technology to the market,” Bill Russo, president of consultancy Synergistics Ltd. told PluginCars.com. “This helps the Chinese access the foreign EV technology while the foreign player has a way to access the EV subsidies with a local brand.”

China has been pursuing electrification for more than a decade, and has released a series of plans that set target production and sales goals and subsidies for purchase of electric vehicles. The most recent plan, which covers 2013-2015, was released a few months ago.

Only Via Joint Efforts

In that plan, battery electric passenger cars are eligible for incentives of up to 60,000 RMB or $9,848 at current exchange rates. Buyers of plug-in hybrid electric passenger vehicles can receive up to 35,000 RMB or $4,103 in 2013. Those amounts will decrease by 10 percent in 2014, and by 20 percent in 2015. 

To be eligible to receive those subsidies, however, the vehicle must be domestically produced. Imported EVs are subject to high import tariffs.

Foreign automakers who want to produce cars to sell in China must do so through a joint venture with a Chinese automaker anyway. That rule was introduced to allow the Chinese companies to access advanced technology. Now, as Russo pointed out, that has been extended to electric vehicle technology.

So Nissan, after some hesitation, will now produce a Chinese version of the LEAF through the Venucia brand, a local brand produced only in China through its JV with Dongfeng, with whom Nissan also produces regular gas-powered vehicles. BMW is doing the same, producing a EV under a local brand, Zinoro, with its partner Brilliance. Daimler does not produce non-electric passenger vehicles with BYD; the Denza joint venture was formed in 2010 specifically to produce electric vehicles.

A BMW EV, but with the Zinoro brand.

The complication with all these joint venture EV launches, said Russo, “is it will only add more competition for the independent carmakers who are trying to develop their own EV products.” That includes BYD and Geely, as well as SUV maker Zhongtai (aka Zotye). The joint venture models will also compete with electric vehicles launched by the state-owned partners, most of whom have launched their own electric vehicles. For example, Dongfeng has showed its own brand EV at other auto shows in China.

For Appearances Only

Whether the local automakers expect to actually sell any of their EVs to Chinese consumers in the near term is a question, however. Supplier sources in China say that much of the activity is more show than substance. And after enthusiastically introducing electric vehicles of at auto shows in China the past few years, at the Guangzhou show this year “most of the local EV products are no longer front and center at the auto show stands,” said Russo.

To be sure, Chinese consumers are generally more interested in buying cars with a foreign badge, assuming that will mean a higher-quality product. But they haven’t been enthusiastic about buying electric vehicles of any brand.

So just having some foreign automaker DNA won’t make EVs much more alluring to Chinese consumers, Yale Zhang, principal at consultancy Auto Foresight in Shanghai told PluginCars.com. “It does not matter who produces EVs, the sales volume will be limited,” he said.

Click here to read this article at PluginCars.com

Japanese carmakers rue lost lead in China

The Financial Times, November 21, 2013

Troubled times at Toyota: sales fell precipitously last year in China
in the wake of a high-profile diplomatic dispute and strikes at car plants over pay

By Tom Mitchell in Guangzhou and Jennifer Thompson in Tokyo

Toyota and Honda picked a bad time to take their foot off the accelerator in China.

As the global car market went into a financial crisis-induced tailspin in 2008, Chinese demand kept expanding, accounting for one-third of the industry’s total growth over the ensuing five years.

Last year, annual sales of passenger cars and minivans remained 9 and 14 per cent below their pre-crisis peaks in the US and western Europe respectively, and recovered to 2007 levels in Japan, according to automotive consultancy AlixPartners. Meanwhile, sales in China’s market more than doubled to 18.6m, making it the world’s largest.

“The downturn didn’t really happen in China,” says Bill Russo, a former US auto executive and Beijing-based industry consultant. “China’s share of the global market rose significantly in 2009 and 2010.”

Toyota and Honda missed the party. Together with Nissan, the “big three” Japanese auto companies’ combined share of the China market crashed from more than one-quarter in 2008 to just 15 per cent in the first half.

Toyota and Honda at least have some interesting excuses. Japanese car companies make for easy targets in China, especially at times of political tension between Asia’s two largest economies.

Chinese nationalist passions boiled over in September last year, after the Japanese government purchased the disputed Senkaku Islands – known in China as the Diaoyu – from their private owner. Japanese car companies briefly halted production as angry crowds targeted their cars and dealerships.

Some Chinese drivers cleverly presented the mob with a moral dilemma – and saved their Japanese cars – by plastering the vehicles with stickers of Chinese flags and other patriotic symbols.

“We lost 50 per cent in sales immediately,” Carlos Ghosn, chief executive of Nissan, said as he delivered first-half results earlier this month. The carmaker is yet to regain the 7.7 per cent market share it enjoyed before the dispute.

Toyota’s vehicle sales also dropped rapidly, with many customers cancelling orders and shunning showrooms. It was forced to reduce production temporarily in some plants by as much as 60 per cent.

Japanese auto executives admit that the severity of the incident took them by surprise, given that previous geopolitical flare-ups had not seriously affected production. “Japanese carmakers always feel that [when it comes to] doing business in China we don’t stand on the same point as western carmakers,” says one industry insider. “We always have to overcome these past political problems.”

Ivo Naumann, AlixPartners’ Shanghai-based managing director, says: “The biggest problem [with these incidents] is on the dealer side. If sales decline or your windows get smashed every three or four years because of some stupid political issue, you ask whether you should continue.”

A series of industrial actions in 2010 that marked the beginning of the end of China’s cheap labour advantage also primarily affected Japanese car plants in southern China. The striking auto workers drew on lingering resentment over their country’s former wartime adversary.

Many analysts, however, do not accept that geopolitics has been the main reason for Toyota and Honda’s poor performance in China over recent years. They point instead to inadequate plant expansions, low levels of localisation and other strategic errors that were made before Sino-Japanese relations hit their latest nadir.

After last year’s turmoil, Toyota’s sales this September rose 45 per cent year on year, according to market research consultancy LMC Automotive, which collates data for every player in the market, while Honda and Nissan’s China business doubled.

But all three companies’ sales over the first three quarters of 2013 remained largely flat or slightly down versus the same period last year, even as the overall market grew a robust 15 per cent.

“The Japanese took a negative view of the market,” says Mr Naumann. “They simply ran out of capacity. There was demand but they just couldn’t supply it.” Toyota in particular, he adds, badly underestimated how fast the market would grow.

Toyota enjoyed a bumper 2008 in China, attaining a 10 per cent market share and becoming the country’s second-best-selling brand after Volkswagen.

But as the global financial crisis took hold, it froze development of a major plant in Changchun, a northeastern industrial centre, and delayed approval for capacity increases at other facilities. The Changchun plant, originally slated to have begun manufacturing in 2010, finally opened last year with an annual capacity of 100,000 vehicles. “We never thought of [China] as an El Dorado,” one Toyota executive admits.

GM is now firmly entrenched in the number two slot.

Some analysts are optimistic that Toyota and Honda have learnt from their mistakes and can bounce back, although it will be a difficult task in what is now the most competitive national market in the history of the auto industry. More than 100 manufacturers are active in China including every major multinational car company.

“They will regain market share,” says Mr Naumann. “They are still formidable companies. They still have excellent cars.”

Tatsuo Yoshida, auto analyst at Barclays, also believes Japanese manufacturers are at last addressing their deficiencies in China after concerns about intellectual property protection had for years dissuaded them from developing more vehicles there. But he expects that the US will remain their key market.

Additional reporting by Henry Foy in London

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

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 

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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Five reasons why auto world is shifting to emerging markets and what it means for India

The Economic Times of India, May 19, 2013

The dichotomy at times is hard to fathom. The India auto industry closed 2012-13 with a sales dip of 6.7%, the first drop in 12 years. The outlook for 2013-14 isn't much brighter, with industry experts and analysts predicting a growth of 3-5%.

Over the past decade, the demand and hence the manufacturing landscape in the auto world has begun shifting from the developed to the emerging world.

Yet talk to top honchos of auto MNCs and you get a different picture. Honda sees India as an important leg on which global growth rests. Ford Motors CEO Joginder Singh says the Detroit carmaker remains buoyant about the country's long-term potential. Ditto for Nissan and Toyota.

The apparent disconnect between the sales slowdown in India today and auto MNCs' long-term ambitions has a good explanation. Over the past decade, the demand and hence the manufacturing landscape in the auto world has begun shifting from the developed to the emerging world.

Here are five reasons why this shift is happening and what it means for India:

1) The Rise of Asia

According to estimates of Brooking Institution, a US public policy research organisation, the US' and Europe's share of the world's middle class — today at around 50% — will dip to 22% by 2030. In Asia, it will more than double from 30% to 64% by then. This shift is already reflected in the automobile industry.



About a decade back, in 2002, Asia's contribution to global production capacity in the automobile industry was 15-20%. Today it accounts for over half. China has become the top country in car sales, beating the US. Auto MNCs, lured by this huge growth potential, are shifting production bases to Asia to be closer to their customers. India with a capacity to produce 3 million cars is the third largest.

With vehicle penetration in India at a low 13 per 1,000 people (compared to 45 per 1,000 for China) and a growing young population, it should soon overtake Korea as the second-largest car producer in Asia, after China.

About a decade back, in 2002, Asia's contribution to global production capacity in the automobile industry was 15-20%. Today it accounts for over half. China has become the top country in car sales, beating the US. Auto MNCs, lured by this huge growth potential, are shifting production bases to Asia to be closer to their customers. India with a capacity to produce 3 million cars is the third largest.

2) Global Platforms, Global Lifecycle

Almost all auto companies are looking to reduce the manufacturing complexity in their product portfolio. They are laying thrust on global platforms — using the same base globally to churn out a range of vehicles. For example, Volkswagen's Polo (a compact) and Vento (a sedan) are based on the same platform. It is now also developing a sub-four metre Vento — on the same platform — specifically for India. It is reportedly considering an MPV and a compact SUV on the same platform.

Increasingly the auto world is seeing a global convergence of the product lifecycle. More and more auto firms are now doing global launches of their products in different markets and also phasing them out simultaneously. For example, Ford EcoSport will soon debut in India as part of its global launch.

"As platforms become globalised, there is less pressure to locate production close to any one market. We're seeing surprisingly strong manufacturing centres developing in North America, particularly the US and Mexico. Of course China, Korea, parts of Southeast Asia and Europe will continue to be strong production hubs," says US-based Jeremy Anwly, vicechairman of Edmunds.com, an auto advisory portal.

3) From High Cost to Low Cost

It helps that production costs in most developed countries like the US, Japan and most western European countries are sharply higher than the emerging markets. Perhaps the only exception is Germany which has maintained its manufacturing edge due to its relentless focus on technology, its thriving manufacturing ecosystem and its focus on high-end cars.



As a result, auto MNCs are shifting their production bases from high-cost economies like the US and western Europe to low-cost countries like China and India. Analysts estimate that producing cars in India today may be 15-20% cheaper than in the US. In fact, there are many countries like the Czech Republic and Argentina — with no primary domestic demand — which are emerging as low-cost export hubs for the regions.

"Rather than setting up duplicate production bases, OEMs are increasingly seeking to gain efficiencies and scale by establishing a production base in the most efficient place — where they can minimise cost and maximise revenue," says Beijing-based Bill Russo, senior adviser, Booz & Company, a consultancy firm.

4) FTAs Shift Balance

Many countries are signing regional or bilateral free-trade agreements (FTAs). The US has signed one with Mexico, India has signed with the Southeast Asian countries. India's FTA with EU though has run into a controversy. The US has signed FTAs with a range of countries, including Mexico which is fast emerging as a car export hub in North America. Turkey is also emerging as production hub, partly due to its FTA with countries like Korea.

5) Convergence of Demand & Norms

At a macro level, there is some convergence of the kind of vehicles that consumers in different markets need. Europebased Mark Fulthorpe, senior manager, IHS Global, says environmental and efficiency norms in different countries today are much closer than they ever were in the past. This means companies have to align their cars with policy norms that are in a much narrower band.

Also, globally, there is a clear shift in consumers' preference for smaller, compact and fuel-efficient vehicles, says Haig Stoddard, a veteran auto analyst with US-based Ward's Auto. All this means that auto MNCs have to deal with a far less heterogeneous policy environment and consumer demand — allowing them more room to pick their production location.