China’s indigenous brand policy backfires

The Financial Times, May 5, 2014

Even the most ardent car lovers would struggle to identify some of the vehicles built by major multinational auto companies in China.

A BMW Brilliance Zinoro, an SGMW Baojun and a Dongfeng Nissan Venucia are among the “indigenous” brands that the Chinese government requires foreign-invested joint ventures to develop in return for approvals to expand production capacity in the world’s largest auto market.

SGMW – GM’s joint venture with SAIC Motor and Liuzhou Wuling Motors – embraced the dictat by developing popular Baojun sedans and mini-cars. SGMW sold more than 100,000 Baojuns in 2013, up almost 20 per cent.

Priced at just Rmb50,000 ($8,000) to Rmb70,000, Baojun’s success has come primarily at the expense of China’s struggling domestic automakers, suggesting that the policy has had at least one unintended consequence.

“After several decades in China, the earliest models introduced by the foreign joint ventures are now priced as cheaply as Chinese brands,” Liu Bo, vice-president of Chang’an Auto, said at a seminar held in conjunction with April’s Beijing car show. “Their ability to focus global R&D resources on the China market is putting a lot of pressure on us.”

March sales of Chinese brand sedans fell 12 per cent year-on-year, as local automakers lost their market lead in the segment to their German rivals led by VW. “The indigenous brand policy is really dumb because all it does is cannibalise the local Chinese brands,” said Janet Lewis, head of Macquarie Securities industrials research team in Hong Kong.

The damage that Baojun and other joint ventures’ indigenous brands, such as Nissan and Dongfeng Motors’ Venucia, are inflicting on Chinese car companies could explain why the government does not appear to be putting much pressure on multinationals who have only done the bare minimum.

BMW’s joint venture with Brilliance Auto “rebadged” the German company’s X1 and electrified it for China’s anaemic new energy vehicle market – thus avoiding confusion with its better selling conventional cars – while Ford has yet to reveal its local contribution to the market.

“Zinoro is a brand of our joint venture here in China,” Karsten Engel, BMW’s country head, said at the Beijing car show. “It’s a brand only for China. It’s based a little bit on the BMW X1.”

BMW chose not to display the Zinoro at the show, instead highlighting its premium i3 electric car. “BMW’s i3 could generate interest in China,” said Bill Russo, founder of industry consultancy Synergistics. “Zinoro doesn’t have the brand panache. Even if it’s an X1 [customers] want to be able to call it what it is.”

The Chinese government’s indigenous brand requirement is particularly challenging for Ford as it runs counter to outgoing chief executive Alan Mulally’s “one Ford” strategy, under which the company jettisoned brands such as Jaguar Land Rover and Volvo Cars to focus on a narrower portfolio.

“We were trying to be world class at so many things,” said Mr Mulally, adding that the strategy was in keeping with the vision of the company’s eponymous founder. “Henry [Ford] wanted to be part of the fabric of economic development in every country in which he operated but he didn’t know that Ford would have a different Ford in every country.”

John Lawler, the head of Ford’s China operations, insisted that the US automaker is in compliance with Chinese government policy mandates, even though it still has not rolled out an indigenous brand.

“We’re satisfying all the requirements from the government but at this point there really isn’t anything for us to announce relative to an indigenous brand or anything along those lines,” said Mr Lawler.

Additional reporting by Wan Li

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China’s carmakers have yet to make their marque

The Financial Times, February 3, 2014

By Tom Mitchell in Wuhan

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

  
  

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

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

Wheels in motion

Passenger car exports

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Additional reporting by Wan Li

Click here to read this article at FT.com

Bill Russo to Chair Automotive Panel Discussion at 19th CLSA Forum in Beijing

Beijing, China, May 12, 2014

Venue:  Grand Hyatt Hotel, Beijing
Time:  11:30am

Panel Discussion Overview: China’s Automotive Market in Transition Following a decade of rapid growth that culminated in a stimulus-driven surge in demand in 2009-2010, the China auto market sharply decelerated, with growth slipping to 2.5% in 2011 and 4.3% in 2012.  This brief slowdown was followed by 14% growth in 2013, with overall sales exceeding 22 million units.  While the market growth has been spectacular, there are rising concerns on the sustainability of this performance as the market may be approaching a saturation point in the traditionally strong coastal regions.  Intense competition among automakers as they pursue emerging growth opportunities in specific regions and segments is anticipated.  The aim of this session is to discuss opportunities and challenges faced by different competitors as they deal with this a transitional period in the world’s largest automotive market. Opportunities and challenges in luxury and imported vehicles market Opportunities and challenges in emerging provinces and cities, as well as in second and third tier cities Sales and marketing strategies to exploit these opportunities Strategies to diversify profit streams and maximize profit opportunities Structural changes that may occur as the market transitions to a slower growth pattern Mr. Uwe Stadtler, CEO of BMW Automotive Finance (China) Co., Ltd. Mr. Manto Wong, CFO, Ford China Dr. Joerg Mull, China EVP and CFO, Volkswagen China Moderated by: Mr. Bill Russo Click here to for a description of the 19th CLSA China Forum

Global carmakers seek China inroads

The Financial Times, April 18, 2014

There will be no Easter holiday for many senior US and European auto executives as they abandon their families and battle jet lag at the largest car show in the world’s largest car market.

The Beijing International Automotive Exhibition, or Auto China 2014, opens on Sunday at a time when the importance of the fast-growing China market to the fortunes of multinational car companies has never been clearer.

In the first quarter of this year passenger vehicle sales in China rose 10.1 per cent to 4.9m units, including a monthly record of 1.85m units in January – a figure that exceeded the 1.8m passenger vehicles sold all of last year in India, Asia’s third-largest economy.

From mass market automakers such as GM to luxury manufacturers Daimler and Ford unit Lincoln, global success depends on success in China.

“Two, three years ago Beijing was an emerging show. Beijing is now on everyone’s calendar,” says Robert Parker, president of Lincoln China. “I told my wife I’d miss her birthday and my children that I’d miss their Easter egg hunt, but all of [Ford’s] executive and leadership team has done that.”

One executive who will not be in Beijing is Mary Barra, GM’s under fire chief executive. But far from the recall scandal that has erupted in GM’s home market, the US automaker expects to sell its one millionth vehicle in China this year during the show.

That puts GM on track to comfortably exceed the 3.2m passenger vehicles its joint ventures sold last year in China, GM’s biggest market accounting for about one-third of total sales. Analysts at Morgan Stanley estimate that joint-venture dividends and royalties from China contribute almost 60 per cent of GM’s free cash flow.

Lincoln will formally enter China’s luxury market, currently dominated by Audi, BMW and Mercedes-Benz, later this year. It is also unveiling a new car at the Beijing show – something it has never done before outside the US.

Bill Russo, founder of automotive consultancy Synergistics, predicts that popular “crossover” models – part sedan, part SUV – and technology features will garner much of the attention at Auto China 2014. “You can’t just come into the market with a car,” he says. “You have to show that you’re different from everyone else because the passenger car segment in China has become very crowded and hyper competitive.”

The competitive pressures are being felt most acutely by China’s largest domestic auto manufacturers, which some analysts feel are on the verge of a crisis.

At the end of last year, Chinese-brand passenger sedans commanded 27.5 per cent of the market, according to the China Association of Automobile Manufacturers, with German sedans in second with 24.3 per cent. Just three months later, German sedans lead with 27.1 per cent compared to 23.7 per cent for their Chinese rivals.

The collapse has triggered an intense debate among Chinese car companies and policy makers about whether shock therapy – in the form of a relaxation of the industry’s 50 per cent foreign ownership limit – is required.

Critics say the policy has encouraged passivity among large state-owned car companies, which enjoy a steady flow of profits from their joint ventures with foreign manufacturers while failing to develop own-brand vehicles that can compete domestically, let alone in Europe and the US.

China’s largest carmaker, SAIC Motor, sold just 230,000 of its own-brand cars last year, compared to the more than 4.7m units sold by its joint ventures with GM and Volkswagen. Sales for China’s “domestic big 5”, which in addition to well-regarded private-sector creations Great Wall Motor and Geely include BYD, Changan and Chery Automobile, are down 10 per cent this year.

“The dramatic decline in domestic [brand] sales so far this year has exceeded even our bearish expectations,” Bernstein Research analyst Max Warburton wrote in a recent note. Bernstein had projected the market share of Chinese brand cars would decline by 2.5 percentage points over the next two years but instead, their share fell 2.6 per cent percentage points in the first quarter of this year alone.

Click here to read this article at FT.com

China is home to the world's flashiest cars. What's behind this new trend?

Smart Planet, April 7, 2014

Beijing might be famous for being the city of nine million bicycles, but in the Chinese capital, cars are now king. A world-record breaking 20 million automobiles were sold across the country last year, making China the world’s largest car market.

With 200 new models released yearly in China, you'd be forgiven for thinking that Chinese customers would be overwhelmed for choice. But, as it turns out, a new group of consumers has emerged who think that what's on offer in showrooms isn’t enough. They are the 'Tuner Tribe' – a subculture of drivers who are investing thousands of dollars to 'pimp up' their rides. 

Numbering in their thousands, they are a small minority of the country's 137 million car owners. But increasing interest in car customization is a sign of a broader trend in China. A new generation of wealthy, globally-connected consumers is emerging. For them, standing out from the crowd isn't to be feared; it's to be pursued.

From Lamborghinis coated in matte pink to local models given a chrome body finish, evidence of the bespoke car craze can be seen in cities across China. Nowhere are the cars more flamboyant than in Beijing's Tuning Street, a hub of 50 garages in the east of the city. Since this commercial district first opened its doors in 2009, mechanics have been lining up to make drivers' dreams a reality. 

Mechanic in Beijing Tuner Street (Gabrielle Jaffe)

 

Located in a poor, dusty area of the capital, where most of the migrant residents can only dream of being able to afford four wheels, Tuner Street has nevertheless become a mecca for car lovers, attracting scores of affluent automobile owners from as far as 60 miles away. Customization services on offer range from changing hubcap colors for $60 to covering the entire car with diamante for $13,000.  

In his garage, where BMW and Ferrari flags hang from the ceiling and images of blinged-out car models line the walls, Gao Xingwan drives a hard sales pitch as he shows off a Porsche he’s been working on: “These glow-in-the-dark stripes only cost ¥4,500 [US$730]. A very low price considering this car cost ¥1 million [US$162,780].”

Techno music pumping in the background, at one of the larger car shops we meet Zheng Zhuan, a saleswoman who brings out color samples for us to look at, including some with a glittery sheen, which she describes as a ‘pearl’ hue. “We place this like a sticker over the entire bodywork. That way there’s no damage done and you can easily change your car color as many times as you like. Some customers change their car design as often as once a month.” 

Sample colors for car bodywork stickers at Beijing Tuner Street (Gabrielle Jaffe)

 

Most of the customers at Tuning Street are in their twenties and thirties – a sign, says Timothy Coghlan, the luxury brand consultant behind maosuit.com, that a new generation of young, wealthy, Chinese urbanites are now confident enough to stand out from the crowd. “Buying a luxury car is no longer enough, they want to show their identity through their purchase,” he says. “We see this in the fashion sector too. It’s not about buying the brands my friends have anymore. It’s about buying the brands my friends don’t have, to show my individual take on the world.” 

In Japan, where Coghlan lived previously for five years, customization primarily meant jazzing up car interiors with items such as leather-rimmed, drop-down televisions. But he says, Chinese drivers are mostly decorating their cars to “show off to the outside world.”

This shift indicates that a more connected China is coming into line with global trends, he says. “Young Chinese people have grown up with the internet. As they see what's out there in the world, former taboos are breaking down. Wearing a bright pink outfit to the office or driving a bright pink car no longer makes you weird. It makes you you.” 

Wider social forces are at work too. More affluent, better educated than their parents, and often the only child in the family, the latest generation of consumers is fostering and being fostered by a new 'me culture,' concerned with exhibiting an individual identity. 

Just one of Beijing's many pimped out cars (Image courtesy of Maosuit.com)

Bill Russo, the founder of advisory firm Synergistics, who boasts several years of experience in China’s automobile industry, also thinks many Chinese drivers treat their cars as “trophies on wheels.” In more mature markets, even when buying luxury cars, consumers still look for value for money, says Russo. But in China, where the buyer of a Mercedes is more likely to be aged under 40 than above 50, there’s a “buy as much as you can afford” attitude.

Government policy has heightened this mentality. In an attempt to curb off-the-scale pollution, an increasingly restrictive quota has been placed on the number of new license plates released each year in big cities like Beijing. The result, says Russo, is that because consumers are not sure when they will next be able to buy a car, they want to purchase the newest, most expensive, best model they can. Adding bespoke design is just another way to make their new trophy shine even more. Some customers will buy the latest Porsche only to take it to a garage the next day and cover it up with customized color stickers. 

Chinese bureaucracy also plays a more direct role in the fad for customization: When license plates are registered, owners also need to register the color of the car. Colors can’t be changed without official permission, which can be hard to obtain.

That’s where Beijing’s enterprising small businessmen come in. By placing giant stickers over a car’s bodywork or adding diamante detailing, they allow consumers to change the look of their vehicle, while side-stepping government restrictions. 

Car at Beijing Tuner Street (Gabrielle Jaffe)

 

Now that Chinese consumers are getting used to customizing their cars, will overseas manufacturers follow demand? Russo points out that if brands were to allow customization, or at least release limited editions of certain models with unusual colors or added stripes, this could be a way to keep notoriously fickle Chinese consumers interested in a model throughout its shelf life. 

“Cars models typically have a five-year lifecycle but in China sales begin to drop quickly as early as a model’s third year on the market. Customization could help keep models exciting.” he explains. 

After all, as Russo puts it, “In China, if it’s not new, it’s not hot.”

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

Chinese manufacturers should behave like an American in Europe

China Automotive Review, November 2013

Extracted quote from Bill Russo:

The current perception of Chinese buyers is that Chinese manufacturers produce low cost and inferior cars compared to the joint ventures. Pursuing a multiple brand strategy is not going to change this especially when there is little difference in quality between the brands. “A multi-brand strategy requires a much higher cost structure to create and market a portfolio of uniquely branded offerings,” warns Bill Russo, president and CEO of Synergistics Ltd., a Beijing-based automotive consultancy. This money would ultimately be better spent on R&D to produce a smaller range of better quality vehicles that are not solely competitive on price and that have a definite design architecture. 

Full posting of this article is not allowed by the journal.  

Making it big: large cars and government procurement

China Automotive Review, October, 2013

Extracted quotes from Bill Russo:

“When China regulates it does so in regard to the stage of its industry and with a certain set of outcomes in mind,” says Bill Russo, president and CEO of Synergistics Ltd., a Beijing-based automotive consultancy.  Both FAW (Hongqi) and SAIC (Roewe) have a history of providing government cars. Hongqi dates back to 1958 and was used for high ranking government officials until they switched to favouring foreign cars. SAIC built the Phoenix and later the Shanghai SH760 for officials not important enough for a Hongqi.

It is also going to be difficult to persuade officials to drive domestic cars if they are perceived to be inferior. “The existing government fleet can hardly be downgraded,” says Russo.

Sales of these large cars so far have not lived up to expectation. Last year the Roewe 950 sold 4,905 compared to 86,101 for the Buick LaCrosse, on which it is based. “It isn’t about just having a product that meets the specifications but the esteem this class of buyer aspires to have,” says Russo.

Full posting of this article is not allowed by the journal.