Competing in the China Truck Market - Policy & Regulatory Outlook

February 5, 2013

by Bill Russo

This is the third installment in a series on the China Commercial Vehicles market.  

Click here to read the first installment.

Click here to read the second installment.

Government policy plays leading role in driving the development and eventual consolidation of China’s auto industry. According to the Plan on Adjusting and Revitalizing the Auto Industry promulgated in the early of 2009, “capable Chinese players are encouraged to grow stronger by M&A and restructure”. 

The plan outlines an intention to consolidate the industry into 2 distinct “tiers”:  the Tier 1 group consisting of companies with an annual capacity of 2 million units that are encouraged to acquire smaller automotive companies throughout China, whereas Tier 2 consists of companies with an annual capacity of 1 million units are encouraged to drive regional consolidation. 

The plan even names four tier 1 companies as well as four tier 2 companies:

  • TIER 1: 
    • Shanghai Automotive Industrial Corp (SAIC)
    • First Auto Works (FAW) Group
    • Dongfeng Motors (DFM)
    • Chang’An Automotive

  • TIER 2
    • Beijing Automotive Industrial Corp (BAIC)
    • Guangzhou Automotive Industrial Group (GAIG)
    • Chery Automobile
    • China National Heavy Duty Truck Corp (CNHTC)

The top 3 HDT manufacturers including FAW, DFM and CNHTC are among the Tier 1 and 2 OEM groups named within this consolidation plan, and are therefore likely to receive extra funding and policy support from the central government when acquiring smaller companies.

Responding to the government policy indication, leading auto groups are actively establishing their growth strategies and seeking to build scale advantage.  Among them FAW, DFM, BAIC, SAIC, and CNHTC are more likely to be acquirers in industry consolidation among the HDT/MDT players.

The early stages of industry consolidation have already begun.  Starting from its acquisition of Nanjing Auto Group in 2007, SAIC has expanded their production bases from Shanghai to Yizheng and Nanjing in Jiangsu province.  FAW is negotiating with Brilliance on business restructuring and acquisition.  If the deal is done, FAW will grow larger than SAIC in terms of scale.  After acquiring Changhe and Hafei, the Chang’An Automotive group possesses nine manufacturing bases across the country.  The company also stated their plans to merge two to three domestic vehicle companies and one parts company within their next 5-year plan.

To defend themselves and avoid being acquired, smaller commercial vehicle companies like JAC, Beiben and others are actively expanding their business coverage, developing special sectors, and establishing product technology cooperation.

For global truck manufacturers, the consolidation of the China auto industry implies that a more structured and disciplined market will eventually emerge which will increase the efficiency, scale and R&D capabilities of the remaining competitors.  Leading Chinese OEMs will seek to expand their ownership of assets and capabilities needed to compete in an increasingly global business. 

Chinese OEMs must therefore move up the value chain to deliver products with competitive technology to address a growing demand generated for world-class quality trucks.  To achieve this, they will undoubtedly allocate larger investments into product development, enabling better responsiveness to the market.  Further, the industry will require better IP protection and enforcement to facilitate technology sharing with international players.

Though industry consolidation will likely be a central theme in the next decade, there are several other policy and regulatory trends that pose challenges to the global truck manufacturers in China.  

First, the China government is closing the gate for international newcomers by raising the entry barrier for new project approval.  Automotive industry policy makers have strong concerns with overcapacity risks in the China auto industry.  These concerns are having an impact on their willingness to consider new vehicle manufacturing projects including HDT.  Therefore, Ministry of Industry and Information Technology (MIIT) released the Admission Management Rule for Commercial Vehicle Enterprises and Products, which took effect from January 1st, 2011, requiring all truck manufacturers to strictly follow current investment and capacity utilization requirements. Despite this, other very challenging policy objectives must also be met, including the upgrading of the technology used in the local brands, new energy vehicle development and export promotion.  Global manufacturers who are willing to share critical technology and capabilities with their Chinese partner may be able to successfully receive approval for their new manufacturing project in China.

Second, although Chinese policy makers stress their serious attention to the subject, Intellectual Property (IP) protection is an area of great uncertainty for global manufacturers.  Global vehicle manufacturers are pushed to transfer their leading technologies in a market where the legislation and law enforcement for IP rights violations is far from sufficient.  Many IP related lawsuits claimed by international manufacturers in China have not been met with satisfactory results, such as BMW’s compliant for Hubei Shuanghuan’s styling imitation of X5, Fiat’s claim for Great Wall’s copy of Panda, as well as GM’s claim for Chery’s copy of the Chevrolet Spark.  Such issues also extend into areas of technology and other transfer of capabilities.  Learning from past experiences, many international manufacturers have taken both technical and commercial measures to protect their IP when cooperating with Chinese partners.  For instance, a modular sourcing strategy from Tier 1 suppliers can be employed (instead of sourcing individual component through the Joint Venture) has become a common practice to protect IPR of the multinational partner.

Third, global truck manufacturers will increasingly face China unique standards, which are influenced by the local players.  Global truck manufacturers who have made significant commitments to the market often feel like a “guest in their own house” when doing business in China.  For instance, the delay of Euro 4 gives local MDT/HDT manufacturers more time to develop their technology, as they retain their enormous cost-advantage compared to foreign high-end OEMs. Similar advantage for Local MDT/HDT manufacturers is the current end-of-life regulation, which requires scrapping after 600,000 km. Such developments might be influenced by politics.  To mitigate risk of such unfavorable standard, global truck manufacturers have to make proactive efforts in involving and lobbying the organizations that develop regulations. The resources and experience of the Chinese partner in dealing with the policy-makers are also essential to be leveraged to address this challenge.

Finally, global truck manufacturers will be exposed to legal compliance risks when working with their Chinese joint venture or affiliated company.  In spite of measures taken to address the problem, bribery and other corrupt business practices are common in China.  Several years ago, individuals within the Daimler Truck division were implicated in an anti-bribery case in China.  Daimler was required to pay as much as USD $185Mn for reconciliation, and the company has been compelled to reinforce corporate compliance in every process of the business operation.  Corrective actions such as establishment of a regional compliance office, compliance-related business processes, mandatory compliance training, and a hotline to report violations of compliance behavior have turned out to be highly effective in mitigating the compliance risk for Daimler in China.

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