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April 09, 2008

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Chinese Automakers are Riding on the Wave of Globalization

BEIJING/Xinhua - Z. H. Studio recently released its report on how Chinese automakers are riding the wave of globalization. According to the report, while most of the giant carmakers are racing to China to cash in on the world's most revved-up auto market, some Chinese car companies are not content to just stay at home. A growing cohort of indigenous firms are flexing their muscles, having new model blitzes and pushing their cars onto the world markets.

The year of 2005 saw the first time exports of vehicles from China exceeded imports, with exports climbing to almost 165,000 units, more than twice the number in 2004. In 2006, exports escalated to 230,000 units, up more than 40% year-on-year.

What are the real stories behind the numbers? Can the cost and market advantages sustain to drive the planetary aspirations of Chinese carmakers? What are the next wave, as well as hurdles, in the process of engulfing the saturated world markets?

Z. H. Studio recently had a chance to do a field research upon China's biggest private carmaker Great Wall Motor (GWM). Headquartered in Baoding City of Heibei province, GWM boasts as China's largest car exporter for nine consecutive years. The case study of GWM, hopefully, provides a revealing snapshot of leading Chinese carmakers -- as a group -- at their perhaps most critical juncture on the journey to become a strong force not neglected in the global market.

Starting from Developing Countries

GWM started to export its vehicles in 1998. Interestingly, it found the export segments during the foreign-aid campaigns -- i.e. a government-led, good-will practice in which resources are mobilized from various domestic enterprises and organizations to help developing countries (e.g. in Africa, East Europe) with infrastructure building, medical services and other public products provision.

''We found that in places like Russia, Middle East and Africa's richer economies -- in terms of consumers' explicit needs and purchasing power -- the auto markets were quite mature,'' recalls Wang Fengying, CEO of GWM, ''But on the supply side, not many manufacturers were serving those markets. We believed that's our opportunity.''

GWM managed to conduct careful due diligence before taking market entry as a strategic step in any specific market. It started exporting autos first to the Middle East, then North Africa, South Africa, Russia, South America, and Eastern Europe. The year of 2006 marked a milestone for the company in that GWM became the first Chinese car brand to appear in the European Union markets. Today, GWM has exported to a total of 121 countries, of which 81 countries see the establishment of stable distribution channels of GWM cars. In 2007, it exported 51,394 autos, which generated revenue of over US$450 million. Average y-o-y increase in export volumes from 2000 to 2007 exceeds 90%.

GWM has now been able to generate half of its sales volume and profit from overseas markets, and secured the position of China's largest auto exporter since the late 1990s. In Xing's view, these achievements can be attributed to GWM's strategic focus on ''simultaneous product, marketing and service line growth'' in key export markets.

To better cater to the local customers, GWM went as far as designing customized models to fit extremely high-temperature environments (e.g. South Africa) and severely low-temperature settings (e.g. Russia). Likewise, as part of the efforts to get closer to the local segments, GWM has set up factories or assembly lines in up to eight countries including Russia, Ukraine, Vietnam, Iran, Indonesia and Nigeria.

Eye on Europe/US

GWM's decade-long experience gained exporting to less developed countries provides excellent training for sales to more developed markets. In this regard, GWM management is non-coy on their EU/US aspirations.

GWM Vice President Xing Wenlin reveals that the company has invested considerable resources to undergo homologation process for readying its vehicles for the European market. Preparation for a pan-Europe Dealers Association (under the GWM umbrella) is also underway in order to better coordinate marketing initiatives, pricing strategies, and even corporate social responsibility programs. While the timetable for invading the US market is unavailable at this stage, certainly the world's biggest and most competitive car market won't be neglected.

Cracking developed Western markets like the EU/US, for sure, won't be easy. According to Hou Yankun, an auto industry researcher from Lehman Brothers (HK), it's tremendously costly and time-consuming for China carmakers to design a vehicle from scratch to meet safety, emission and other regulation requirements in the EU/US before a vehicle may be mass produced. Another huge challenge will be a leap of faith among Western customers to trust Chinese autos.

In some industry analysts' view, however, the progress Chinese auto firms make toward challenging European, Japanese, Korean and US auto makers among price-sensitive buyers is a first step toward becoming the next Hyundai Motor in developed markets.

Some thirty years ago, Toyota, now the world's second-largest carmaker, and Koreans' offerings were all widely ridiculed when first engulfing the US markets. Nowadays, Japanese car brands are gaining market share in nearly every part of the world and have long ago stopped competing on price. US car companies are under threat in their own backyards from the likes of Toyota. Korean cars have penetrated developed markets even faster than the Japanese assemblers, and successfully been able to climb the wall of quality, design and innovation. The argument goes, why can't the Chinese do the same thing?

Possible to Leapfrog?

But it is also possible that making comparisons between Chinese carmakers' routing and the Japanese/Korean track record is simply ''old-school'' thinking. According to both insider information and expert opinions, Chinese auto makers are exploring a ''leapfrog'' approach to achieving the cutting edge in technology and know-how.

In GWM's case, the company has collaborated closely with a variety of international engineering services companies, design studios and increased use of components and technology available from global, tier-one automotive suppliers. For instance, it has partnered with BOSCH to develop the new engine family of turbo-diesels. It has outsourced the Michigan-headquartered Delphi Co. to supply powertrain and in-car electrical/electronic architecture. More recently, GWM has also commissioned Modine Manufacturing to supply exhaust gas recirculation coolers and other thermal technology solutions.

International Capital as a Lever

For the auto industry, the costs of building new plants and model line roll-outs run into billions of dollars, let alone establishing dealerships and 4S centers in foreign lands with a new brand. According to Lehman Brothers' Hou Yankun, even in a very promising scenario, a vehicle with a production cost of about US$5,000 in China will have to be sold at US$10,000 in order to make US$1,000 profit which translates to 10% net margin, the highest net margin in the US market. A simple back-of-the-envelop calculation suggests that GWM will need to sell 2 million units to even recover its upfront investment in the US market, Hou adds.

That perhaps partially explains the fact that GWM has actively used the capital market as a lever to finance its overseas expansion. Back in 2003, the company issued an amount of stocks equal to US$220 million through an IPO at the Hong Kong Stock Exchange. In May 2007, GWM raised another US$210 million from the Hong Kong Stock market through a share placement.

While the overseas IPO and capital raising is largely perceived by the market as an effort to enhance the company's financial well-being, the GWM top management maintains that it has the aspiration beyond that. ''The international capital market serves as a fantastic catalyst for us,'' says GWM CEO Wang Fengying, ''by that lever we started to work closely with the top- tier international bankers, lawyers and auditing firms; we also developed a pipeline for attracting and retaining international talent. All these have invaluable impacts upon our company's management know-how and sustainable development in the long term.''

(April 4, 2008)

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