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

March 1, 2013

by Bill Russo

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

Click here to read the first installment.

Click here to read the second installment.

Click here to read the third installment.

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

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

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

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

Mid-market form

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

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

Breeding ground

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

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

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

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

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

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

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

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

Nissan’s Teana Tests Chinese Willingness to Buy Japanese

Bloomberg News, March 1, 2013

After protests erupted across China last year over Japan’s nationalization of disputed islands, sales of Japanese-branded cars there plummeted. Nissan (7201) Motor Co.’s prescription for winning back Chinese drivers: a quieter ride and better gas mileage.

Nissan introduced its new Teana sedan on Feb. 26 in the southern Chinese city of Guangzhou, the site of riots that saw Japanese businesses looted last year. The company is counting on the car to revive sales in its biggest market, and as the first major new model by a Japanese automaker since the protests erupted last September, the Teana will serve as a barometer for sentiment toward 
Japanese brands.

The revamped Teana “is critical in helping Nissan regain the momentum lost 
after the islands crisis,” said Bill Russo, president of auto consultancy 
Synergistics Ltd.

The redesigned Teana claims better fuel economy than rivals such as the 
Volkswagen Magotan, Toyota Camry, Honda Accord and Chevrolet Malibu. It 
features redesigned rear suspension, rear- view monitor cameras, and seats 
inspired by spaceship technology that the company says promise less fatigue on long drives.

Designed by a team led by Nissan’s joint venture with Dongfeng Motor Group Co., the new Teana is 18 millimeters (0.7 inch) longer, 35 mm wider and 15 mm taller than the previous version and has more interior space than the 
Camry and Magotan.

More Chrome

To attract the Teana’s target demographic of a 34-year-old married man with a young child, Nissan gave the car a bolder front grille and used more chrome than is available on the Altima, a similar U.S. model that shares many parts. Since Chinese drivers value a quiet ride, Nissan beefed up the soundproofing and raised the car’s height for rougher roads.

Nissan also stiffened the feel of its door knobs and engineered its door panels to give off a solid sound when tapped, as the company says that’s how many Chinese buyers assess safety and quality.

“This is the first time we have seen a flagship model designed for this market with a very clear focus on the Chinese customer,” Andy Palmer, Nissan’s 
executive vice president in charge of global product planning, told reporters in Guangzhou.

Nissan expects buyers to pay a premium for the new Teana. Starting at about 190,000 yuan ($30,500), it’s roughly 4,000 yuan to 28,000 yuan more 
expensive than the base models of the Accord, Camry and Malibu, according to data from auto-pricing website Yiche.com.

Better Mileage

That extra cash will buy gas mileage of 7.3 liters per 100 km with a 2.5-liter engine, versus 9.5 liters previously for the base model. That compares with 8.4 liters for the Accord and Camry, and 8.0 liters for the Malibu, according to company specifications compiled by Bloomberg.

Nissan, the biggest Japanese carmaker in China, is expecting a jump in first-year sales with the new Teana. Sanford C. Bernstein says it’s the most 
profitable of the dozen-plus models the automaker sells in the country. The Teana accounted for 12 percent of last year’s sales for the Dongfeng-Nissan joint-venture.

The last time the Teana was redesigned, in 2008, sales surged 54 percent after dropping 17 percent the previous year. The trend was repeated in 2012, when deliveries of the Teana plunged 42 percent to 90,072 units, 
exacerbated by nationalist tensions and competition from the Camry and Magotan, both redesigned in 2011. The Teana’s slump was the worst among the 10 top-selling midsize sedans in China, according to researcher LMC Automotive.

‘Tough Time’

Any first-year boost may be tempered by lingering anti- Japanese sentiment. Nissan says its overall China sales for the first two months are about 20 percent lower than the year- earlier period. The country last year accounted for about a quarter of all of Nissan’s vehicle sales.

“A single model isn’t enough to solve the problem entirely,” said Koji Endo, managing director at Advanced Research Japan. The Teana “should be a big help, but probably even with this new model, Nissan will continue to face a tough time there.”

Researchers at Bernstein say midsized sedans like the Teana are becoming a tougher sell in China as more consumers choose SUVs, and as German 
premium brands such as Audi introduce entry-level models.

“Even before the islands crisis the Japanese were suffering sliding pricing and profitability,” Max Warburton, an auto analyst at Bernstein in Singapore, said in a Feb. 26 report. Despite Nissan’s expectation of a substantial boost this year in China from the new Teana, “we’re more cautious.”

‘Getting There’

Nissan earlier this month reported that third-quarter profit fell a more-than-
estimated 35 percent to 54.1 billion yen after sales tumbled in China and new models trailed competitors in the U.S. Its shares have risen 16 percent this year, versus a 19 percent gain for Toyota Motor Corp.

Nissan had the biggest sales decline in China last year among the three leading Japanese carmakers, with deliveries off 5.3 percent in 2012, versus drops of 4.9 percent at Toyota and 3.1 percent for Honda. (7267)

A rebound in Chinese demand would help the automaker regain ground after sales of the new Altima, its bestseller in the U.S., trailed the Camry and Honda’s Accord.

In China, “the situation is getting better, it’s getting normalized,” Ghosn said on Feb. 26 at an event near the company’s headquarters in Yokohoma, Japan. “We’re getting there.”

To contact Bloomberg News staff for this story: Tian Ying in Beijing at ytian@bloomberg.net; Ma Jie in Tokyo at jma124@bloomberg.net

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