Restructuring will set stage for new golden age of China's auto industry

South China Morning Post, January 21, 2015

The old automotive industry model - a way to provide mobility for middle-class consumers - no longer 

fits the Chinese context, creating opportunities for innovation.

After a decade of breathtaking growth, China surpassed the United States as the world's largest automotive market in 2009. Since then, in spite of a recovery in US sales, China has widened the gap, with sales of 23.5 million vehicles compared with 17 million in the US. 

However, the 7 per cent growth of last year was about half that achieved in 2013. In fact, China has witnessed single-digit growth in three of the past four years, prompting many market followers to label this the "new normal". Some say the best times for China's automotive industry are now in the past. 

Indeed, there are many reasons to worry. In addition to the overall slowdown of China's economy, a growing number of cities are implementing curbs on car sales, seeking to address concerns about congestion and emissions. Last month, Shenzhen joined a growing list of cities, including Beijing, Tianjin , Shanghai, Guangzhou, Hangzhou and Guiyang , in an effort to cut the growth of the car population by limiting purchases. 

Meanwhile, the rising inventory of unsold vehicles has prompted the China Automobile Dealers Association to openly challenge global brand-name manufacturers, including BMW and Toyota, to increase incentives to their dealers and lower sales targets for 2015. While there is certainly cause for concern in the near term, we believe China's auto market is moving into a new phase, one that still offers the most profitable growth opportunities in the world for both local and global carmakers. Indeed, China's auto industry is on the cusp of major change that will fundamentally reshape things, bringing both opportunities and challenges. 

The age of inefficient, asset-driven growth is over. Overall, there is a capacity bubble after some manufacturers over-estimated growth prospects.  The problem is worst at the middle and lower end of the market. An already hyper-competitive environment will become more cutthroat as manufacturers try to undercut competitors' prices to sell excess stock.

Restructuring China's auto industry is essential to ensure its stable and healthy development. Government policies were implemented over 30 years ago to allow China to acquire the capabilities and capital from foreign sources to build up its domestic industry. While this has helped spur overall growth, it has not yielded a strong base of domestic carmakers. Consolidation and the elimination of weaker brands is inevitable. 

China's automotive industry will continue to expand, but at a more sustainable rate, with a steady stream of first-time purchasers from lower-tier cities joining the repeat buyers and those upgrading in the more established regions.  

A more "binary" market will emerge, with consumers in upper-tier cities continuing to prefer global brands, while those in lower-tier cities will seek no-frills products.  

However, pockets of "new wealth" will emerge in lower-tier cities, too, and these people will begin to mimic the buying patterns of more affluent customers.  

This presents unique opportunities for both foreign and domestic manufacturers. For example, Ford and Great Wall anticipated the shift towards small SUVs and have been enjoying above-average growth. Likewise, European luxury carmakers, such as Audi, BMW, Mercedes-Benz and Land Rover, have seen sales rise exponentially in recent years as a result of the growth in the number of high-net-worth consumers. 

In future, new segments, such as crossover and multi-purpose vehicles, may emerge but they may not be as large or as profitable as the SUV/luxury sectors. Thus, we believe a new golden age is on the horizon for China's auto industry. China remains the largest and fastest-growing automotive market in the world. After years of advances in mobile connectivity, big data and social networks, "internet of vehicles" technology is now shaping the industry as "connected mobility" drives advances in navigation, analytics, driver safety and driver assistance. 

The old automotive industry model - a way to provide mobility for middle-class consumers - no longer fits the Chinese context, creating opportunities for innovation.  

A new solution to personal urban mobility is likely to emerge in China, given the scale of its urban transport challenges and increasing concerns over the environmental impact of conventional vehicles. Indeed, the traditional car-ownership model is being reshaped by urbanisation, the rising aspirations of young consumers, and the development of communications technology and "big data".  

A number of new concepts are emerging, bringing non-traditional players, many of whom are Chinese, into the ecosystem. Examples include taxi-hailing apps such as Alibaba's Kuaidi Dache and Tencent's Didi Dache, which each process over 5 million transactions a day. 

As the leading automotive market, China is poised to revolutionise the global car industry, ushering in the next age of smart vehicles and connected mobility.  

Edward Tse is founder and CEO, and Bill Russo is managing director, at Gao Feng Advisory Company, a global strategy and management consulting firm with roots in Greater China

Click here to read this article at SCMP.com 

Jaguar Land Rover’s first China factory caps carmaker’s resurgence

The Financial Times, October 21, 2014

The opening of Jaguar Land Rover’s first China factory caps a five-year resurgence under Indian ownership that has made the Coventry-based company a byword for British manufacturing excellence and export prowess.

The new plant in Changshu, about a two-hour drive from Shanghai, marks a pivotal moment for JLR. The Tata Motors unit needs a manufacturing presence in China to consolidate its position in the world’s largest car market – but also wants to assure its British workforce and the UK government that international expansion will not jeopardise jobs at home.

As part of that effort, JLR is boosting investment at its factories in Liverpool and the West Midlands and this month opens a new £500m engine plant in Wolverhampton – even as it plans to open another manufacturing facility in Brazil. Last week, JLR’s factory in Halewood, Merseyside began producing the new Land Rover Discovery Sport after a £200m investment that created 250 new manufacturing jobs and £3.5bn in supplier contracts.

The Changshu factory, a Rmb10.8bn ($1.8bn) joint venture with state-owned Chery Automobile that opened on Tuesday, will produce JLR’s less expensive Range Rover Evoque for the China market, where the company sells almost five SUVs for every one Jaguar saloon. On Tuesday, JLR said that it also intended to produce a Jaguar saloon model at the factory by 2016.

“The demand that’s here in China will far outstrip [Changshu’s] capacity so we have absolutely zero plans to export any cars whatsoever,” Bob Grace, JLR’s China head, said at this year’s Beijing Auto Show.

Mr Grace hosted UK trade unionists in China at the outset of JLR’s investment programme in an effort to allay their fears. “You can imagine the thoughts that go through their mind when you open a factory in China,” he said.

“When you look at the competitive situation it doesn’t take long to realise that you have to build the cars in China as part of our global aspirations to be a fairly significant player.”
Roger Maddison, at UK union Unite, was one of JLR’s guests and says the union accepts the logic of the Changshu investment but has concerns about the longer-term trend it signals.

“Tata knows what differentiates JLR from other carmakers – it’s British,” says Pierluigi Bellini, analyst at IHS Automotive. “If they start developing cars in, say, India, it’s going to be a different brand image . . . Developing it from scratch – blank white paper to the final design – it’s important to keep that in the home market.”

Tata bought JLR from Ford in March 2008, a week after JPMorgan bought Bear Stearns. When Lehman Brothers went bankrupt six months later, the global financial crisis began in earnest and Ratan Tata, then chairman of the Indian group, had plenty of reasons to regret his purchase.

But the Indian provenance of JLR’s new owner hinted at the multinational nature of its future transformation, which would be built on surging demand in developing economies. The most important of these was China, whose emergence as the world’s largest car market coincided with the US government’s December 2008 bailout of General Motors.

“During the early part of 2009 we were pretty close to the wire as a business,” said Mr Grace. “But I used to come to China once a quarter and got a sense that something different was happening in this place . . . It’s almost a miracle that the [China] factory has come out of the ground in such a short period of time.” JLR’s joint venture with Chery was announced less than two years ago.

Bernstein Research predicts JLR will sell 130,000 vehicles in China this year, compared with 54,000 total units in 2009-2011. The Changshu factory’s initial annual production capacity is 130,000 vehicles but output is expected to ramp up gradually over the next few years.

“No other [carmaker] has benefited as much from China,” Max Warburton, senior analyst at Bernstein Research, wrote in a recent report. The country now accounts for a third of JLR’s total sales and, Mr Warburton estimates, more than half of its earnings before interest, tax and depreciation. In its latest quarter JLR posted pre-tax profit of £924m, on revenues of £5.35bn.

But the success has been driven by the Land Rover side of the company – in particular the Range Rover Evoque, a sporty 4x4. JLR sold more than 90,000 cars in China last year, but only 16,000 of these were Jaguars. The big three German brands – Audi, BMW and Mercedes-Benz – sold more than 1m. 

JLR joins the “big three” Germans as the fourth big premium carmaker to begin manufacturing operations in the world’s largest car market. Annual sales of premium vehicles, currently about 1.3m, are expected to reach 2.5m-3m units by 2020. But the Germans dominate the sector, with a combined market share of about 80 per cent. 

“There’s lots of opportunity for new premium entrants,” says Bill Russo, a Shanghai-based industry consultant. “The market is underserved. The German three alone can’t continue to maintain that kind of dominant market share. They can’t keep up with demand.”

JLR estimates that local manufacturing has allowed its German rivals to reduce prices by about 15 per cent on average, thanks to savings on import tariffs and other costs. The UK company, by contrast, has what Mr Warburton calls “the most egregious pricing in China”.

In response, Mr Grace says JLR has “worked quite closely with [Chinese regulators] in terms of reacting to the challenges they gave us [on pricing]. We more than met their requirements”. He adds: “We’re not setting the market price – we’re following the market price.”

JLR reduced prices on some Range Rover and Range Rover Sport models earlier this year in China, in response to a concerted campaign by the National Development and Reform Commission to drive down the pricing of vehicles and spare parts.

But the price differential between the same Land Rover models sold in China and other markets remains wide, with a top-end Range Rover selling for the equivalent of £85,400 in China and £44,000 in the US.

Click here to read the original article at FT.com 

豪华车品牌开辟巴西战场 寻找新增长点_网易财经

China Business News, November 28, 2013

在巴西，汽车销售份额占首位的是意大利品牌菲亚特，为22.8%，其次是德国大众和美国通用，分别占21%和19.8%。

不过这个局面或即将被豪华车品牌打破。捷豹路虎、宝马、奥迪等豪华品牌正在布局巴西市场，试图在新兴市场中寻找新的增长点。

据路透社报道，巴西地方政府透露，捷豹路虎将斥资10亿巴西雷亚尔（约合4.37亿美元）在里约热内卢州建造一座新工厂，捷豹路虎新工厂选址位于伊塔蒂亚亚，预计最早将于2015年投入运营，该公司将于12月3日就这一计划发布官方声明。

在巴西投资设厂将成为捷豹路虎在海外市场中第二个生产基地，第一个海外生产基地则通过和奇瑞汽车合资的形式，设立在中国。

巴西汽车经销商协会Fenabrave提供的数据显示，今年前10个月中，路虎在巴西市场累计销售了8920辆汽车，宝马与奔驰在这一市场的同期销量则分别达到了1.15万辆与1.05万辆。

捷豹路虎在巴西市场设厂不是一家豪华车品牌的个案。近两年来，多家豪华车企已经敲定或考虑在巴西投产，或将产品引入巴西市场。

去年10月份，宝马宣布投资2.0亿欧元（约合2.61亿美元）在巴西建立一座整车厂，以加快在巴西市场的销售增长速率，新工厂将位于圣卡塔琳娜州，2014年投产，设计年产能3万辆。

奥迪紧随其后。今年9月份，大众汽车宣布一项投资计划，计划在巴西投资12亿雷亚尔（约合5.29亿美元），开始在当地组装最新款高尔夫车型并重启奥迪豪华车在巴西的生产。大众汽车发言人表示，奥迪预计从2015年开始在巴西启动生产，并在3年内使A3紧凑车的年产量达到2.6万辆，还将在巴西Ingolstadt工厂生产Q3紧凑型SUV。

梅赛德斯-奔驰也对外宣布了对巴西市场投资的计划。对于豪华品牌车企纷纷对巴西市场投资的现象，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对《第一财经日报》记者表示：“最根本的原因是巴西有可能是未来10多年中增速最快的市场之一。为了不在未来的竞争中落后，豪华品牌车企投资巴西是很正常的一个策略。”

公开的数据显示，巴西已经超过德国成为世界第四大汽车市场。在过去的十年中，国内登记的轿车数量增加了将近一倍。“巴西乘用车市场近年来稳步增长，过去5年年均增长率达到7%，其中中高级轿车的增长速度更快，因此越来越多汽车厂商考虑增加在巴西的投入。”普华永道中国管理咨询业务合伙人金军对本报记者表示。

根据盖世汽车网统计，今年前三季度，巴西轻型车的新车累计销量为263.84万辆，去年同期则为266.68万辆，今年同比下跌1.1%；整体车市累计销量278.03万辆，去年同期为278.90万辆，今年同比下跌0.3%。

“巴西的政局、经济发展稳定，是仅次于中国汽车市场体量的新兴市场。这几年，巴西市场每年的新车销量大概在360万~400万辆之间徘徊，销量比较稳定。”江淮汽车高层对本报记者表示。江淮汽车今年已经宣布通过和巴西当地企业合资的形式在巴西设厂。

罗威表示，巴西进口税也使得车企在巴西投资以及本地化有了更大吸引力。2011年年底，巴西政府出台新税政：进口汽车或没有按巴西政府要求完成国产化率指标的汽车生产企业，将被提高30%的税率，同时对在巴西增加投资的汽车商提供税收减免政策。

不过，本田汽车和通用汽车公司已表示巴西豪华车销量仍然不令人乐观，因此他们不会考虑使巴西成为生产高端市场车型的基地。

Click here to read the original article

Unite trade union ends DHL-Jaguar Land Rover dispute

wsws.org, September 7, 2013

An extract from the article:

JLR is in a joint venture with Chinese car manufacturer Chery in building a new £1.1 billion car manufacturing plant near Shanghai that will be in operation in 2015. China is rapidly becoming the main market for JLR’s top-selling Range Rover Evoque, which is currently produced at Halewood. Bill Russo, the president of the Chinese-based management consulting firm Synergistic Ltd, warned JLR last year it needed to be “localised, as quite frankly, their competition is localising.” Russo was referring to Volkswagen, Daimler, Audi, Mercedes Benz and BMW, which have located production to China under joint venture operations. By joining up with Chery, JLR will avoid the 25 percent import duty levied against foreign automotive imports.

Read the full article at wsws.org

Volkswagen China Recall May Cost More Than $600 Million

Bloomberg News, March 20, 2013

Visitors view a Volkswagen Golf automobile as part of the Auto Guangzhou 2009 Exhibition in Guangzhou on Nov. 24, 2009.

Source: China Photos/Getty Images

Volkswagen AG (VOW) recalled a record number of vehicles in China to replace defective gearboxes that may result in the loss of acceleration, in a move that may cost Europe’s largest carmaker more than $600 million.

The recall of 384,181 vehicles, conducted by Volkswagen and its joint ventures, include the Golf, Magotan, Sagitar and Audi A3, China’s quality inspector said on its website. While Volkswagen declined to comment on the financial toll, research firm LMC Automotive estimated the replacements will cost between 3,000 yuan ($483) to 10,000 yuan per vehicle.

The move is a blow for Volkswagen, which counts China as its biggest market, as the company sets out to become the world’s largest automaker by 2018. The recall comes less than a week after state broadcaster China Central Television featured Volkswagen customers in China complaining about abnormal vibrations, loss of power and sudden acceleration in cars equipped with the company’s proprietary gearbox technology.

“It’s always reputationally damaging to have to deal with an issue that plays out in the public’s eyes,” said Bill Russo, president of auto consultancy Synergistics Ltd. “Will they take a hit? Of course. The issue is how can they recover from that and how quickly can they recover.”

21 Models

The company is recalling vehicles with the seven-speed variety of its direct-shift gearboxes, bearing the cost for replacing defective equipment and upgrading the software, it said in an e-mail statement. LMC estimates Volkswagen sold about 680,000 vehicles equipped with the potentially faulty DSG gearboxes.

“There have been no injuries or accidents reported due to the DSG gearbox problem, as far as we know,” Volkswagen China spokesman Christoph Ludewig said.

The recall covers 21 types of vehicles including versions of the Scirocco, Bora, Touran, Octavia, Passat vehicles produced as far back as 2008 and as recently as this month, according to the state inspector’s statement.

For Volkswagen, which sold 4 of China’s top 10 selling cars last year, complaints about its gearbox system in China aren’t new. In May, the Wolfsburg, Germany-based carmaker agreed to extend the warranty for the transmission technology to 10 years, compared with the standard warranty of two years, to address consumer concerns.

China’s quality inspector said it began investigating complaints related to faulty Volkswagen gearboxes in March 2012. Two months later, the company extended its warranty for the transmission system after several rounds of talks with the regulator, according to the statement.

Safety Threat

A malfunction of electronics in the gearbox or inadequate pressure may result in the loss of power, presenting a safety threat, according to the regulator. Last May, Volkswagen spokesman Harthmuth Hoffmann said that the reported problems -- noise, vibrations and failure to start in hot and humid weather -- were “absolutely not a safety issue.”

Volkswagen said today that although an electronic malfunction or a lack of oil pressure may result in a power interruption, steering and braking functions wouldn’t be affected. That means that even if the car loses power on the road, the driver would be able to safely stop the car, it said.

China’s quality regulator said it interviewed more than 3,000 consumers, received more than 10,000 reports of faultiness, conducted 12 spot checks and held 7 hearings with automotive experts before concluding that the Volkswagen gearboxes were defective and posed a safety concern.

New Laws

The move also comes after China introduced recall laws this year giving the watchdog broader powers to order investigations and impose fines on companies that fail to call back faulty products in a timely manner. The nation’s legislature approved plans last week to expand the authority of the food and drug regulator amid growing public discontent over quality and safety.

Volkswagen and its ventures sold 2.81 million vehicles in China last year, second only to General Motors Co. (GM) among foreign automakers. The German company and its Chinese partners generated operating profit of 3.7 billion euros ($4.8 billion) last year, up by 1.1 billion euros from the previous year.

Other German automakers have also faced scrutiny in the past week from CCTV, which said it found asphalt in China-made models of cars made by Volkswagen’s Audi, Bayerische Motoren Werke AG’s BMW and Daimler AG (DAI)’s Mercedes-Benz.

Asphalt Audis

Samples taken from vehicles showed traces of asphalt, a road-paving material also used for reducing vibrations, CCTV reported. Owners reported a pungent smell in their cars and physical symptoms such as dizziness and swollen fingers, according to the CCTV report.

Representatives from all three companies said they have started investigations. Audi China spokesman Martin Kuehl said Audi has the same “strict standards” for all of its parts globally, while Daimler spokesman Senol Bayrak said all its vehicles manufactured in China use only imported NVH damping materials that comply with existing regulations.

The three German luxury brands command about 74 percent of China’s luxury segment, according to estimates from researcher IHS Global Insight.

While the report might not significantly affect total luxury car sales, it could push Chinese consumers toward choosing imported models of luxury marques over models manufactured in China, according to John Zeng, Shanghai-based managing director at LMC Automotive. Tata Motors Ltd. (TTMT)’s Jaguar Land Rover and Zhejiang Geely Holding Group Co.’s Volvo Cars may benefit since they focus on imports, he said.

“People will choose the import models, because they realize that on quality levels, the import models are very different from locally-made ones,” Zeng said.

To contact Bloomberg News staff for this story: Alexandra Ho in Shanghai at aho113@bloomberg.net; Tian Ying in Beijing at ytian@bloomberg.net

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

Click here to read this article at bloomberg.com

Jaguar Land Rover and Chery investing in Chinese plant

Autoblog, November 24, 2012



While the European auto market for Jaguar and Land Rover is waning, Chinese car buyers can't get enough of the British marques. To meet that demand, Tata Motors, parent company of Jag and Land Rover, is partnering with Chinese automaker Chery Automobile Co.

The two announced plans to invest $1.75 billion to build a new plant and create a new, China-focused brand. 2014 is the target for completion of the factory. Jaguars and Land Rovers built at the facility will be the first ever produced outside the UK according to the Associated Press. The JV will be called Chery Jaguar Land Rover Automotive Company Ltd.

The announcement comes less than a month after JLR announced it would open a design studio in China. It's not clear from the reports whether the two announcements are part of the same JV or two separate plans.

China requires any company wanting to set up domestic production to partner with a local business. By doing so, JLR avoids a 25-percent tariff on imported cars. Chery benefits from a planned research and development center as well as a chance to "really upgrade its capabilities," according to Bill Russo of Synergistics Ltd. in Beijing.

Click here to read this posting at www.autoblog.com

Jaguar Land Rover-Chery to Invest $1.75 Billion in China Plant

Bloomberg News, November 19, 2012

Tata Motors Ltd. (TTMT)’s Jaguar Land Rover unit and Chery Automobile Co. will invest 10.9 billion yuan ($1.75 billion) to build a manufacturing plant in eastern China and create a new brand to cater to the nation’s consumers.

The 50:50 venture will also set up a research and development center and construct an engine plant as part of the investment, according to a statement by Jaguar Land Rover. The company didn’t say in its release which models will be built at the new factory, targeted for completion in 2014.

Enlarge image

“China is now our biggest market,” said Ralf Speth, chief executive officer of Jaguar Land Rover. Photographer: Jason Alden/Bloomberg

“China is now our biggest market,” Ralf Speth, chief executive officer of Jaguar Land Rover, said at a press briefing yesterday after the groundbreaking ceremony for the factory in Changshu, Jiangsu province. “The Chinese economy has grown at a phenomenal rate in recent years and by any western standard, and I’m convinced that it is set to continue to grow at an astounding rate into the future.”

Jaguar Land Rover joins Volkswagen AG (VOW)’s Audi, Daimler AG (DAI)’s Mercedes-Benz and Bayerische Motoren Werke AG (BMW) in locating production in the world’s biggest vehicle market. The government requires overseas automakers to work with local companies to produce domestically and avoid the nation’s 25 percent import duty.

“Both parties need each other,” Bill Russo, president of Synergistics Ltd., said by phone from Beijing. “JLR needs to be localized because, quite frankly, their competition is localizing. It gives Chery an opportunity to really upgrade its capabilities in a time when it really needs that.”

Expansion Plan

Profit at Jaguar Land Rover rose 77 percent in the second quarter to 305 million pounds ($487 million). Surging China sales of Land Rover vehicles led by the Evoque have helped Speth offset slowing demand in Europe. The Gaydon, England-based unit said in May it will spend 2 billion pounds this year to expand under a plan to introduce 40 new or upgraded models in the next five years.

Jaguar Land Rover, which showed its first two-seat sports car in almost four decades at the Paris Motor Show in September, is targeting as much as 20 percent of the full-size sports car market, Steven de Ploey, the marketing head for Jaguar, said Sept. 27. The company will also begin deliveries next year of the new Range Rover SUV.

Jaguar Land Rover sold 25,176 vehicles in October, a 10 percent increase from a year earlier, driven by demand for the Evoque and Range Rover Sport. Combined sales in the first 10 months rose 35 percent to 294,291 vehicles.

At yesterday’s event in Changshu, Chery Auto Chairman Yin Tongyue told reporters that it is “not the right time” for an initial public offering for the closely held company.

Click here to read the article at bloomberg.com

Luxury Auto Market in China Remains Robust

Investor Conference Call, November 8, 2012

THE PULSE

Coleman Research Group is hosting a conference call to evaluate the outlook for the Chinese Luxury Auto Market. We’ll evaluate growth strategies for the German OEM leaders, market size, competitive forces, demographics, key brands and dealership dynamics. To register or for more information please contact Carla Sison at GRIEvents@colemanrg.com. Luxury Auto Market in China Remains Robust Premium Vehicle Segment Appears Immune to Market Dynamics Call Date: Thursday, November 8, 2012, 10:00 AM EST CRG Host: Michael Cohen CRG Expert: William Russo Founder and President Synergistics Ltd. About The Call Affluent Chinese car buyers shun Chinese brands in favor of blue-chip European premium brands. The Big Three German OEMs continue to dominate high-end sales with Audi offering the best-selling premium import. Premium vehicle (PV) sales increased 36% during the first nine months of 2012 and are expected to grow 15-20% annually through 2020, reaching 2.7M units over that timeframe. Automobiles are the number one priority for China’s high-end and middle class consumers but carmakers must keep pace with changing tastes and an increasingly competitive backdrop.     With our expert, Bill Russo, we’ll explore China’s premium car market and sales growth expectations for 2012 and beyond. We’ll evaluate the dominance of the Big German Three and the opportunity for smaller players to penetrate the market. We’ll assess Chinese consumer preferences, growth of the middle class and high net worth individuals. We’ll appraise how the Chinese demonstrate less brand loyalty than their U.S. counterparts, offering opportunities for new entrants. We’ll conclude with a look at how to leverage strategic dealer partners to accelerate market access.  CARLA SISON Vice President Global Research Intelligence 646-695-3281 MICHAEL COHEN Director Global Research Intelligence 646-783-6052 JESSICA OWEN-SMITH Research Manager Global Research Intelligence 646-307-8277 Coleman Research Group's expert is prohibited from disclosing any proprietary, confidential, or material non-public information, and will decline to answer any question that may lead to the disclosure of such information. The information in the GRI event series does not constitute advice as to the value of securities or as to the advisability of investing in, purchasing, or selling securities. Furthermore, neither members of the GRI team nor Coleman Research Group is acting as an investment adviser, and no information contained in the series should be construed as investment advice. Coleman Research Group, Inc., 120 West 45th Street, 25th Floor, New York, NY 10036 Tel: 212-223-0185 | Email: crg-gri@colemanrg.com | www.colemanrg.com

Two to Tango

CKGSB Knowledge, May 2012

While Jaguar Land Rover and Chery Automobile stand to gain from their partnership, they must realize that just having a joint venture is not enough to succeed in the Chinese market

As you stroll down the busy streets of Beijing, it is hard not to notice the array of cars whizzing past. From frugal QQs to flashy Audi saloons, it seems every car company wants its share of the world’s largest auto market. Domestic automakers seem to have the budget market sewn up, but some of the world’s luxury marques also see profits in China. The country is now Bentley’s largest market – first quarter 2012 sales in the region are up by a whopping 84.9%. Even supercar maker Lamborghini has courted the Chinese market with the multi-million RMB limited edition Murcielago LP670-4 SV.



The newest entrant on the scene is Jaguar Land Rover (JLR) which is looking to take advantage of its decidedly British luxury branding by signing a joint venture (JV) agreement with China’s Chery Automobile. While JLR wants to build its brand in China, perhaps Chery is hoping to gain some much-needed luxury allure – maybe even hoping to follow in the footsteps of the Land Rover Evoque with Victoria Beckham-designed interiors for its future product lines.

The JLR-Chery JV has been in the pipeline for several months and comes close on the heels of Geely’s takeover of Volvo and JVs between Chinese and foreign automakers like Mercedes Benz, Volkswagen and Audi. The idea is to manufacture JLR- and JV-branded vehicles, establish a research and development facility, manufacture engines and sell vehicles produced by the JV company.

A Win-Win Deal

In a joint statement, JLR CEO Ralf Speth and Chairman and CEO of Chery Automobile Company Ltd Yin Tongyao said: “Demand for Jaguar and Land Rover vehicles continues to increase significantly in China and we believe that JLR and Chery can jointly realize the potential of these iconic brands in the world’s largest car market.” No further details were divulged, but sources suggest that the deal is worth around RMB 17.5 billion. There is an initial planned production capacity of 50,000 units, to be staffed by 5,000 people.

It is pretty clear that JLR wants to develop its brand within China, which is already its fastest-growing market for saloons and SUVs. In the past JLR used to import vehicles, but to become a major force in China, local production is the only option and that cannot happen without a JV.

Chery appears to be looking for a way to move up the automotive value chain. The hope is that some of JLR’s luxury appeal, quality production and proven technologies will benefit Chery’s branding and product development in the future as it tries to establish itself as a big player in the domestic automobile market.

Professor Teng Bingsheng, Associate Professor of Strategic Management at CKGSB, has been studying strategic alliances for a while now. “Chery is one of the only remaining Chinese state-owned car companies that have not previously agreed (to) a joint venture,” he says. “The trend has been pretty clear: without a big-brand foreign partner and the accompanying expertise and technology they can provide, it is hard for any Chinese automakers to really make big strides.”

With demand and supply reaching equilibrium in China, companies like Chery require the increased competitive advantages that are potentially available through a JV with an established foreign auto brand.

“Chery has been able to grow on its own over the last 10 to 15 years, as its position in the lower end of the car market, which has grown faster than the higher end market, has allowed it to become quite successful,” says Professor Teng. However, the market is now reaching an equilibrium. As growth slows and competition becomes stiffer, companies like Chery are going to find it harder to compete.

Overcoming Red Tape

Despite its obvious advantages for JLR and Chery, there are a number of issues that still need to be resolved. Most notably, although the deal has been announced, approval from Chinese regulators is still required. This means it could be a year or more before any action can be taken.

But there’s a bigger issue at play here. China’s National Development and Reform Commission (NDRC) has been reluctant in the last couple of years to grant further approvals for automotive JVs, with a growing sense that the market is already overinvested and cannot bear further deals.

“Concerns regarding approval are realistic given that even after Geely’s outright purchase of Volvo two years ago, they have not yet received approval to begin production within China, says Professor Teng.

Bill Russo, a China auto industry expert and President and Founder of automotive consulting firm Synergistics, adds, “Geely found out earlier this year that to produce vehicles in the new facilities that they intend to build, the two parties – Volvo and Geely – need to form their own JV. This is somewhat unusual given that Geely already owns Volvo, but it is consistent with how China has previously allowed foreign-branded auto companies to access the market.”

Although Geely’s takeover of Volvo is very different from the JLR-Chery JV, the problems of approval remain. As Chery is state-owned, it does have an advantage over Geely and that might speed up the process to a degree.

Lack of Experience?

Chery may see JLR as an ideal partner for its future plans, but question marks still remain regarding how a luxury car manufacturer and a value brand such as Chery can really cooperate for mutual benefit – particularly given Chery’s lack of experience in working within such a JV. There is a realization that even if Chery believes they are fully capable of handling this – without adequate government and industry support – the deal could fall through. China’s diesel car king Hawtai is a good example of this – its JV with Hyundai came apart in 2010 and its rescue bid for Saab fell through.

“This may be Chery’s first ‘marriage’ in terms of a JV with a foreign automaker, but it isn’t their first ‘date’ by any means. Chery has tried to do deals with Fiat and Chrysler before, but couldn’t quite make it. Their intentions have been clear for a while,” says Russo.

In each of these cases, Chery was not to blame for the failure. The Fiat deal did not receive approval, and in the case of Chrysler, it was the restructuring of the company during the US auto crisis that caused this deal to fizzle out, despite a promising start.

Whilst Chery has yet to prove itself in terms of working with a foreign partner, Russo does believe that the companies can overcome challenges associated with being from different market segments, and that this could even prove beneficial.

“You want a company that has already proven itself, and Chery has proven that it can build a large automotive business. Furthermore, JLR has many of the capabilities Chery does not yet possess, particularly in terms of making high-end products.” says Russo.

Both of these companies seem to have complementary abilities, and now it is really down to the commitment of the parties to make this ‘marriage’ work.

Late Entry?

While there are some clear advantages for JLR as they look to develop within China, it could be said that they are entering the market too late. Other brands like Audi and Mercedes Benz are already well-established and the overall car market in China is beginning to slow somewhat. Vehicle sales in China rose a scant 2.5% in 2011, the slowest growth in over a decade. The market is becoming saturated, and JLR will have to act quickly to gain any ground.

“They will need to catch up quickly…. Other brands are already embedded in the luxury segment, so to be successful JLR will need to be creative in the way that they tackle the market,” says Professor Teng.

Although Russo believes that China’s auto market is overinvested in terms of the number of companies in the market, he still sees the potential for JLR’s Land Rover products, particularly as the SUV segment is one of the fastest growing in the country.

“In terms of the chronology of events, JLR is entering the market late. However, given the stage of market development, particularly in terms of premium SUVs, there are very few established, localized premium makers producing premium SUVs in China,” he says.

Not an Instant Solution

“Joint ventures will potentially help Chinese companies to look beyond the domestic market, but it is a long shot and will take significant time,” says Professor Teng. For example, SAIC, China’s largest automaker by volume, has had JVs in place for over 20 years, but it has taken the purchase and resurrection of the MG brand in the UK for it to see any traction outside of the domestic market. Whilst SAIC saw sales top nearly 4 million in China in 2011, MG Motor UK started 2012 with 107 sales in January in the UK, 103 in February and a new record of 236 cars sold in March – the best one-month performance since the company was formed in 2009. This is something to build upon certainly, but shows how slow the progress can be.

Although JVs can be mutually beneficial, they are not a fast-track to success in China’s auto market, or an automatic gateway to international markets for domestic brands. Right now it is still all about the domestic market and its maturation from increased volumes to greater product differentiation and sophistication. This is a challenge for both partners in any JV, but with the right cooperation and mix of expertise, there is still room for growth in the market.



http://knowledge.ckgsb.edu.cn/detail/two-to-tango

Traffic Jam in China's Auto Market

The Wall Street Journal, April 23, 2012

By TOM ORLIK

With so many car makers accelerating into China, the risk of a pile-up is growing.

The Beijing auto show, which opens its doors on Monday, has become the biggest extravaganza in the biggest car market in the world. Victoria Beckham—the artist formerly known as Posh Spice—is in town to promote the Range Rover Evoque. Maserati is showcasing a SUV.

China's massive population, rising wealth, and growing demand for autos make the excitement easy to understand. From 2008 to 2011, unit sales increased 98%. Analysts speak breathlessly about demand's taking off when gross domestic product hits $10,000 per capita, measured in purchasing-power-parity terms. China is projected to cross that threshold in 2013.

But amid the sound of auto makers revving their engines in unison, there are reasons for caution.

Excess capacity is a risk. Bill Russo, an expert in China's auto sector at Synergistics, estimates that production capacity in China in 2015 could be as high as 28 million units. With sales at 18.5 million in 2011, producers are betting on a lot of demand growth.

On the recent evidence, they might be riding for a fall. Unit sales rose just 2.5% in 2011. The excuse then was that the end of tax incentives to buy cars had dented sales. But the bad news has continued in the first quarter of 2012, with sales down 3.9% from a year earlier.

Competition at the luxury end of the market, where margins are highest, is especially intense. The Maserati SUV, slated for production in 2014, will jostle for position with offerings from Porsche, BMW BMW.XE -4.34% and Mercedes DAI.XE -4.22% . Ford is planning to bring new SUV models to the China market. In the budget-passenger segment, margins are lower, and domestic players are also grasping for market share.

Auto makers can't pass up the opportunity to get into the China fast lane, and there will be some winners. Audi grew its greater China sales 37% in 2011. But the road to higher profits is looking a little jammed.