Mulally Hones Ford's China Focus

The Wall Street Journal, April 15, 2013

By MIKE RAMSEY

Associated Press

Ford's Alan Mulally, shown in Beijing last August, is spending more time in China amid big new investments.

SHANGHAI—Just a few years ago, Alan Mulally, Ford Motor Co.'s chief executive, spent about 10% of his time on matters related to China. These days, the world's largest auto market consumes about one-third of his and his top lieutenants' schedules, each week.

The increased focus is key for Ford's future because the company has a lot of ground to make up here. A latecomer to China, the Dearborn, Mich., auto maker has about 3% of the Chinese market. Volkswagen AG  puts its share at 18.2% and General Motors Co. calculates its 2012 share at 14.6%.

Moreover, Ford is spending big to catch up. The company has committed to spending $5 billion to build five plants in China to go along with the four it has now, and will need to increase its market share to be able to use all the plants' output. The auto maker also is aiming to double the number of dealerships to about 800 by 2015, bring 15 new vehicles to China and launch the Lincoln brand here in 2014.

"Clearly this is going to continue to be the highest rate growth for us, both in revenue and profits, over the next few years," Mr. Mulally said in an interview on the eve of this month's Shanghai auto show. "The entire team is spending more and more time in Asia-Pacific."

On Monday, Ford Asia chief David Schoch predicted the company's market share here might reach 6% of sales after Ford completes a model build-out in 2015.

Many foreign companies in autos and other industries are now getting a sense of the subtleties and complexity of operating in modern China. In recent weeks, even long-established foreign companies with legions of Chinese fans have run into unexpected difficulties.

Apple Inc. made a public apology recently after state-run media published reports about customer-service flaws. Volkswagen was pressured into an expensive transmission recall after another Chinese TV report called into question the quality of its gearboxes. Likewise, Japanese auto makers are still struggling to regain sales after a heated dispute over uninhabited islands in the East China Sea pummeled their sales in China.

After years of approving new auto factories, the Chinese government has become concerned about excess production capacity and now tends to be more cautious about approving new plants. The government also is keen to see domestic brands become more competitive with foreign makes, Mr. Mulally said.

Ford began producing cars in a Chinese joint venture in 2003, four years after GM and 18 years after Volkswagen. The late arrival caused Ford to miss out on partnerships with the larger car companies in the coastal cities of Shanghai and Beijing, where the bulk of car buyers have been in the past decade.

Ford has a joint venture with Chongqing Changan Automobile Co., based in Chongqing, in the country's interior. Ford is hoping to catch a second wave of growth as economic development spreads to second- and third-tier cities, which tend to be less wealthy than Beijing and Shanghai but still have huge populations.

In a reflection of its efforts to put China into the center of decision-making, Ford's U.S. management is shifting U.S. meetings to early in the morning or late in the evening in order to better accommodate executives in China, who are 12 hours ahead.

"We get up really early, we stay really late," said Mark Fields, Ford's chief operating officer, who recently ran a business meeting from a conference room in Shanghai until past midnight local time. "It gives us the sensitivity that we are a 24-hour business."

The company soon will start producing a new 1.5-liter, four-cylinder engine that was developed in part to avoid a Chinese tax of about $300 a year on vehicles with engines larger than 1.5 liters. The new engine will be sold in markets around the world, including the U.S., beginning in September. It will be offered alongside a 1.6-liter motor in some markets.

Mr. Mulally has decades of experience and many business and governmental contacts in China as a result of his 37 years at Boeing Co. BA +2.14% and the last six at Ford. Two weeks ago, he was one of 100 delegates at the China Development Forum in Beijing, a gathering that brought together China's new political leaders and CEOs from around the globe.

"It was very exciting because we had all of the new Chinese leadership there," Mr. Mulally said. Deciding to push forward with the $5 billion expansion was "one of the most important decisions we made six years ago. The minute we made the decision, we were very focused on it, especially me."

He also makes visits to the Chongqing mayor's International Economic Advisory Council.

"At the most fundamental level, being involved is really, really important," Mr. Mulally said. "We feel very, very comfortable with our position there."

In the first quarter of this year, Ford's sales in China rose 54% over a year earlier, driven by its Focus compact. It just started selling the Kuga sport-utility vehicle, a clone of the Escape SUV, and the larger Explorer SUV, which is being exported to China this month.

Although GM and Volkswagen continue to expand in China, Ford is gaining on its Japanese competitors, which have been hurt by the political backlash stemming from a dispute between China and Japan over islands in the East China Sea. Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co. have suffered declining sales amid the tensions.

"You've got this situation where you have a whole bunch of Japanese brand [shoppers] looking for something else," said Bill Russo, founder and president of auto consulting firm Synergistics Ltd. and a former DaimlerChrysler AG  executive. "Ford is really hitting its stride at the best possible moment."

A version of this article appeared April 16, 2013, on page B7 in the U.S. edition of The Wall Street Journal, with the headline: Ford CEO Revs Up Auto Maker's China Role.

Urban middle class boosts China car sales

The Financial Times, April 11, 2013

Strong economic growth and consumer confidence boosted first-quarter car sales in China as the mainland shook off last year’s weakness to resume strong double-digit growth.

Light vehicle sales in the world’s largest vehicle market rose 17 per cent to 4.42m in the first three months of the year. In March alone, sales of cars, sport utility and other passenger vehicles climbed to almost 2m, the China Association of Automobile Manufacturers said on Thursday.

“China’s auto industry delivered solid double-digit growth, driven by continued expansion of its population of urban middle-class buyers,” said Bill Russo of Synergistics auto consultancy in Beijing and the former head of Chrysler in China.

But he warned against over-optimistic assumptions about future market growth, which has led to excess capacity in the past, especially among state-owned domestic carmakers.

Local independents Geely and BYD recently said they were optimistic about auto demand this year with the new government leadership in place.

“We are confident about this year’s growth,” said Lawrence Ang, executive director at Geely in Hong Kong last month. “China’s overall economy will be improved from last year, helping to boost vehicle demand.”

However, Bernstein Research analyst Max Warburton cautioned in a recent note that despite stronger than expected first-quarter sales in China, future yearly growth was not likely to exceed 6-7 per cent.

“Capacity additions still look set to outstrip demand,” he said, adding that he expected the industry to add at least 3.8m units of capacity by the end of the decade.

European and American car brands continued to take market share from Japanese rivals in China in the first quarter, auto analysts said, as the continuing political impact of a dispute over a set of islands left Japan’s carmakers struggling to recover ground.

Luxury car sales in China continued to moderate from previous high double-digit levels, partly affected by the government’s austerity programme, which may have caused some buyers to delay ostentatious consumption.

But medium-term growth in the luxury sector is expected to remain strong as few retail analysts are predicting permanent impact from the austerity campaign.

“Compared to the US, Chinese [luxury car sales] will continue to grow at a stable and sustainable rate whereas the US and Japan are simply recovering from lost volume. China’s luxury market will likely double in size over the next five years,” Mr Russo said.

Click here to read this article at FT.com

Chinese Dilemma: 170 Auto Makers

The Wall Street Journal, April 10, 2013

TAIZHOU, China—The U.S. auto industry has long had three big domestic car makers. China has more than 170, including tiny Zhejiang Jonway Automobile Co.

Small-Car Companies Undeterred in China

Jonway makes a sport-utility vehicle named after the Airbus A380 jumbo jet. Its A380 SUV starts at 70,000 yuan ($11,272) and is marketed as a smooth, low-maintenance ride.

Customers aren't buying it. Last year Jonway sold about 5,000 cars compared with the more than 7,000 that Volkswagen AG sells on average in China every day.

Little Jonway isn't fazed by the market reception. It plans to release a new SUV model this year, beef up marketing and is considering exporting vehicles to South America. It continues to work on its technology with the help of supportive local officials, and it just received a license from the Chinese government to begin making electric cars.

"China is the largest car market in the world, and it still has potential to grow. Our ambitions are congruent with reality," insists Alex Wang, Jonway's 31-year-old, U.K.-educated chairman.

Optimistic Chinese auto executives like Mr. Wang send shudders through the rest of the global auto sector. Industry watchers worry that the world's No. 1 auto market could soon be awash in overcapacity. That would rev up competition in China and pressure companies here to export more of their cars.

"We may see high levels of overcapacity and significant margin pressure within the next three to five years," said Bill Russo, president of auto consulting firm Synergistics Ltd. and a former Chrysler executive. He estimates that China's overcapacity in three years could total 10 million cars, roughly equivalent to Japan's 2012 auto production.

Overcapacity worries aren't confined to cars. China has a glut of factories in industries ranging from steel to construction equipment to solar panels. Beijing encouraged heavy investment in those industries to move away from its dependence on low-level manufacturing. While central government officials signal that they want to tamp down on capacity, local governments are still backing local champions that are major employers.

China's car-making capacity is set to soar in coming years. General Motors Co., Volkswagen and Ford Motor Co . are building new factories and assembly lines. China's top 10 auto groups—which make both foreign and domestic brands—are expected to have combined capacity to build about 35 million vehicles a year by the end of 2015, according to their previous announcements, compared with 18 million vehicles in 2012.

But sales growth is slowing. McKinsey & Co. forecasts that China's auto market will grow by an average 8% a year through 2020, down from a compound average rate of 24% between 2005 and 2011.

Experts expect domestic brands will incur the brunt of the slower gains because foreign brands such as GM and VW enjoy a reputation for quality among Chinese drivers. Foreign brands currently make up roughly two-thirds of China passenger car sales. Last year, Dong Yang, vice chairman of the semiofficial China Association of Automobile Manufacturers predicted about half of domestic brands may disappear in coming years.

But many Chinese companies enjoy subsidies designed to bolster local champions. For example, the western city of Chongqing said last June it would give a subsidy of up to 3,000 yuan for buyers of some models of vans made by local car maker Chongqing Changan Automobile Co., while FAW Car Co. said in August that the northeastern city of Changchun would offer a subsidy of between 3,500 yuan and 7,000 yuan for buyers of some cars made by the company. The U.S. last year filed a case before the World Trade Organization arguing that China unfairly supports auto companies and parts makers, an accusation Beijing disputes.

Many are also looking abroad. Last year Chinese auto exports rose 19% to one million vehicles, mainly to markets in the Middle East, Russia, and South America, according to the trade association.

Chinese officials have acknowledged the problem. In July, the Ministry of Industry and Information Technology said China has more than 171 car, truck and bus manufacturers, and said passenger vehicle producers that make fewer than 1,000 vehicles for two years in a row will be ordered to overhaul production.

China has auto makers even smaller than Jonway. According to research firm IHS, a company called Tianqi Meiya sold 77 passenger cars last year. The company, in the north Chinese city of Tianjin, didn't respond to requests for comment.

Jonway builds its vehicles in Taizhou, an eastern city where local officials are pushing to create their China's version of Detroit. According to a plan the city issued in 2010, officials committed to giving local auto makers land and helping them recruit talent, and it allowed banks to roll over loans to cash-strapped companies.

Other auto companies doing business in the region include Zhejiang Geely Holding Group Co., the Chinese auto maker which acquired Volvo Car Corp. from Ford Motor Co. in 2010.

Jonway's U.S. parent, a Santa Rosa, Calif., electric vehicle company called Zap, said in its most recent annual securities filing that the Chinese auto company received $1.6 million in subsidies and incentives in 2010 and 2011 combined. Jonway reported a 2011 loss of $10.2 million on sales of $54.3 million.

Mr. Wang's father and Jonway's founder, Wang Huaiyi, is a major Zap shareholder and a member of the board. The Wang family started its China-based business in the early 1980s, producing everything from buttons for clothes to parts of electric fans. In the 1990s it began supplying parts for motorcycles made by Geely before the latter began making cars.

Inspired by the high-profile success of Geely Chairman Li Shufu, in 2003 the senior Mr. Wang invested 600 million yuan, or about $72 million, in an SUV manufacturing facility with an aim at targeting China's growing middle class.

The younger Mr. Wang began managing Jonway in 2008 two years after returning from studying in the U.K. "I've never thought of the overcapacity problem," he said. Jonway "has done very well in the motorcycle business and it needs a bigger platform to grow. The car industry is just the platform through which we can grow stronger."

Jonway used Toyota Motor Corp.'s RAV4 SUV as a reference when designing the five-door A380, he said. Its sales grew to nearly 8,000 in 2010 from 4,500 the year before.

But sales began slumping in 2011 with China's decision to end buyers subsidies for cars with engine capacity of 1.6 liters or smaller. Mr. Wang said he believes the sales problem is marketing.

"Building brand recognition needs time," he said. "Jonway is in urgent need of improved marketing."

Jonway aims to sell 20,000 SUVs and minivans this year, and plans to add 50 dealers to its existing network of 100 dealers across the country. Other efforts include bigger dealer incentives, more advertising spending and a push to raise its profile at this month's auto show in Shanghai, he said.

It is also eyeing exports, targeting volume of 3,000 vehicles in emerging markets such as South America and Africa, Mr. Wang said. Jonway parent Zap has a team of Spanish-speaking sales representatives, "which is a unique edge to us."

— Rose Yu

A version of this article appeared April 10, 2013, on page B10 in the U.S. edition of The Wall Street Journal, with the headline: China Lets 170 Auto Makers Bloom.

Click here to read the article at wsj.com

Bill Russo to Discuss Chinese Auto Market at Investor Conference Call

Investor Conference Call, April 4, 2013

Thursday, April 4, 2013, 10:00 AM EDT

Chinese Auto Market at an Inflection Point

Slowing Sales and Crowded Competitive Landscape Challenge Ford and GM

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. As Director, Product & Business Strategy at DaimlerChrysler, Bill led the integration of three key functions: strategic and long-range product planning and the capital investment plan. 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.

-  China’s automotive industry has arrived at an inflection point, following a period of rapid growth that culminated with a stimulus-driven surge in demand in 2009-2010. Since then, the industry has sharply decelerated, with total auto sales growth slipping to 2.5% in 2011 and 4.3% in 2012.   Although overall market growth has decelerated, there is still sustainable and healthy activity occurring in lower-tier regions of the country, as well as in certain segments such as premium cars and compact SUVs.

-  With our expert, Bill Russo, we’ll analyze how the Chinese auto market is downshifting to a more sustainable growth pattern in line with GDP.  We’ll evaluate the intense competition among the foreign and domestic brand vehicle manufacturers as they attempt to adjust to this new pattern while maintaining profitability. We’ll examine consolidation opportunities and look at automotive suppliers and dealership dynamics. We’ll conclude with a focus on General Motors and Ford and how the companies are positioned to pursue expansion in the Chinese auto market.

For more information, contact:

Michael Cohen

646-783-6052

mcohen@colemanrg.com

Competing in the China Truck Market - Winning in China's Mid-Market

April 1, 2013

by Bill Russo

This is the fifth 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.

Click here to read the fourth installment.

Most multi-national companies that aspire to be global leaders have no choice but to find a way to win in the Chinese mid-market. 

The common strategies employed by MNCs are to:

1. Ignore the risk and avoid competing in China’s mid-market altogether.
2. Offer global products and wait until China catches up to more upscale demand, which works only for a limited number of sectors.
3. Pursue a two-tier strategy with a core brand sold along with a lower-priced “good enough” brand considered. MAN is following this approach since early 2011 and Daimler trucks are considering it with their partner Foton.

Multinationals simply cannot afford to cede this mid-market to local competitors.  Instead, they must set about organizing themselves to face the emerging Chinese competitors on their own terms – with products that meet Chinese

needs, developed at Chinese cost, and which can then be taken out of China to other markets around the world. They must stop thinking about what it is they can bring to China, and instead start focusing on what China’s mid-market can offer them – what culture and structures they must adopt that will allow them to innovate at a lower cost and to deliver the goods and services that will drive the next round of global growth.

A good example can be found in the construction equipment industry. Caterpillar, which in the 1990s focused on government relationships and selling traditional, high end products to China, shifted focus after the entry of Japanese and Korean competitors in the mid-market segments, and being squeezed by lower-end local players. In the late 2000’s, Caterpillar acquired Shandong Engineering Machinery and formed local R&D centers to expand into lower end market, while optimizing its cost base to compete. Clearly, Caterpillar reasoned, there was a market segment that was here to stay and CAT’s traditional product and business model positioning wasn’t going to be adequate.

In the medical equipment sector, another good example of a mid-market innovation was General Electric’s development of ultrasound machines. From 1990 to 2000, GE served the Chinese ultrasound market with machines developed in the US and Japan, priced at $100K and upwards. While these products were successful with a narrow set of hospitals, the price point was above the affordability threshold of many. In 2002, GE’s local team in China leveraged GE global resources to develop a cheaper, portable machine, priced at $30-40K. And then in 2007, GE’s local, China organization launched a dramatically cheaper model, priced at only $15K. The result of these step-wise innovations in somewhat functionality but at dramatically lower price points, were products that saw rapidly increasing sales in China from $4M in 2002 to $278M in 2008, and at the same time, these mid-market products found new markets abroad. As it turned out, there had been latent demand for lower-priced ultrasound machines even in the world’s most developed markets, but neither GE nor its competitors had realized this or pursued this demand with relevant products.

Mid-market products are not simply lower-cost variants to global, high end products that can be delivered at lower price points.  Foreign and Chinese companies will bring very different mindsets into the battle for the middle market.

Although the competitive strategy to address the middle markets may be different, the path for both Chinese and foreign companies is the same: access the middle market growth opportunity to both extend brands and product reach with the magnitude of impact that can change the global competitive landscape.    

Ultimately, mid-market capabilities rooted in China can be leveraged to tap global markets with similar demand patterns.  

While the size and importance of the Chinese mid-market opportunity may be understood, it is often unclear how Multinationals can participate in the market.  The Chinese market is already highly fragmented, and the pathway to entry for foreign players is not obvious.  However, we believe that several market entry options exist.  It is important to understand that competing in Chinas rapidly expanding and highly competitive mid-market will require an integrated set of capabilities.

For example, MAN SE (Maschinenfabrik Augsburg-Nürnberg), in a joint venture with China’s Sinotruk, has maintained a two-tiered strategy since early 2011.  Vehicles for the Chinese market are sold under the Shandeka brand name, and those for other emerging markets across Asia, Africa, and the Middle East are sold as Sitrak.  This strategy allows MAN to sell two different vehicles at two different price points to two different markets, with separate business models.

In China’s passenger vehicle market, similar two-tiered strategies are increasingly adopted by international OEMs in the form of Joint Venture local brand development.  Starting with the Everus brand launch by Guangzhou Honda in 2010, Shanghai GM Wuling, Dongfeng Nissan, and Dongfeng Honda have each launched their respective JV local brands.  The vehicles carrying those brands are often originally branded vehicles at the end of their life cycle, which are rebranded after certain local adaptations are made to meet the taste of the Chinese consumer.  Such an approach is intended to generate higher volume through upgraded old generation vehicles without diluting the brand image of international players.

The two-tiered strategy, with separate but parallel business models, can be effective:  it enables companies to compete in mid-markets where they otherwise could not.  However, it is not a trivial task for many global producers of industrial equipment to build the capabilities needed to sell effectively to mid-market customers in China.  They must invest in Chinese (or equivalent) R&D and product development, simultaneously integrating their new operations with their old and managing intellectual property challenges. They also lack the home advantages that Chinese mid-market innovators possess: the knowledge of their market niche, access to low-cost production resources, and a deep understanding of the regulatory and operational environment.  Joint ventures such as MAN’s can help, but they also add complexity.

A small number of global companies are focusing on developing an integrated capabilities system that approaches Chinese mid-market customers and Western higher-end customers in an integrated way.  This requires a relentless focus on improving operations and product development together with regional integration.  For example, a company might migrate more parts of its value chain and innovation practices to China and other lower-cost countries — with the intent not of saving labor costs, but of gaining distinctive production and sourcing capabilities that can be put in place around the world. These new efforts can specifically target the country’s mid-market and use local engineers and research staff accustomed to more frugal ways of thinking.  It may not be obvious at first how particular product lines will be affected, but the new efforts can act as springboards for the kinds of ventures that lead to capabilities that can be leveraged around the world[1].

---

[1] Edward Tse, John Jullens and Bill Russo, “China’s Mid Market Innovators”, Strategy & Business, Summer 2012, Issue 67.

Chinese gear up for number plate auction

The Financial Times, March 22, 2013

The “Chinese dream” is to own a flat, a car – and, increasingly, a number plate.

As the world’s biggest car market battles some of the world’s worst traffic congestion and air pollution, licence plate rationing has driven prices up to the point where a Shanghai plate costs nearly three times as much as a cheap Chinese car.

Touts throng the entrance of the art deco auction house near Shanghai’s famous Bund, where owners queue up to register for Saturday’s monthly municipal plate auction – Shanghai’s largely unsuccessful effort to control the number of cars on the city’s narrow and chaotic roads.

Bank of Shanghai has even set up a desk inside, just in case any of China’s notoriously cash-rich car buyers – who frequently turn up at dealerships with pockets stuffed with renminbi – cannot quite manage the Rmb90,000 ($14,500) likely to be needed to get one of the 9,000 plates in this month’s auction.

“The price will just keep rising, so I want to get one as soon as possible,” says Jin Xiaowei, a would-be car owner who says he has no hope of getting a plate unless he uses a middleman to bid for him.
Shanghai is trying to crack down on middlemen, who often double as touts, hoarding and reselling plates on the second-hand market.

To make matters worse, many buyers say they cannot get a plate at all unless they pay Rmb500-Rmb1,000 in commission to the middlemen. “I won’t bid myself,” says Mr Jin. “The prices change dramatically in the last minute of the auction, and you cannot evaluate the price as accurately as the [professionals] do.”

“Car plate prices have recently gone beyond our imagination,” state media quoted Jiang Ping, Shanghai’s deputy mayor, as saying this week. “We need to take various means to bring them down.”

At a time when air pollution and congestion are some of China’s biggest political issues, several cities are considering ways to reduce the number of cars on urban roads, either through congestion fees, auctions or a plate lottery.

Beijing offers 20,000 plates a month by lottery – but some residents complain it is easier to win a fortune in the Chinese state lottery than to win the plate lottery. The southern city of Guangzhou is running a one-year trial of a hybrid auction-lottery system, and Guiyang has a limited lottery.

But the restrictions are not conquering congestion, says Bill Russo of Synergistics auto consultancy, and a former head of Chrysler in China. “Such measures attack the symptoms but not the root causes: weak enforcement of traffic laws, lack of parking and inconvenient public transport. Tokyo and New York have more cars per capita than Beijing but nowhere near the same traffic congestion.”

The policy also inadvertently penalises local brands, he says: “When Chinese consumers have to spend that kind of money to put a car on the road, they tend to buy one that has more value than the registration plate. This does not favour domestic carmakers, who tend to offer low-priced cars.”

With additional reporting by Yan Zhang in Shanghai

Click here to read this article at FT.com

Bill Russo to Address UCLA Business School Delegation

Beijing, China, March 29, 2013

Presentation titled "Strategies for Success in China" to be delivered to students and representatives of the EMBA/FEMBA at 8am at the Regent Hotel in Beijing.