Article :: State of Transportation Manufacturing Sector in China

State of the Transportation Sector in China
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By Randall W. Edge, M.B.A.

 During the spring of 2007; the M.B.A. class of the University of Regina made an extensive research trip to mainland China. As a participant it was a course requirement to maintain a journal of my observations as well as a summary of these observations. Here is an excerpt of the paper submitted by Randall W. Edge.
 

 It is obvious to anyone visiting China that the Chinese has discovered and embraced the automobile. The domestic demand for transportation in the form of scooters, motorcycles, cars, vans, and trucks in all makes and models is currently not being satisfied by domestic production. China has encouraged the creation of joint ventures with foreign investment components with such globally based companies as General Motors and Volkswagen as part of its effort to meet this strong demand for transportation; most notably for passenger automobiles. Demand is so strong that the distribution of products for sales appears to be based upon proximity to manufacturing facilities in preference to extended distribution automotive dealership networks that exist in North America. The distribution network for the sale of automotive products is observed to be underdeveloped throughout China. For example, in an unscientific survey of vehicles passing the author's tour bus (Sunday, April 14, 2007) the observed preference for vehicles in Shanghai was for Volkwagen's Santana 2000s or 3000s, which was observed 70 of 180 passing vehicles (38.8% of the time). However in Beijing there was a clear preponderance of passenger vehicles of manufacture by General Motors of Shanghai (specifically Buick products).

 The price of passenger vehicles in China was observed to bear some resemblance to prices paid by consumers in North America. While visiting the showroom of the General Motors manufacturing facilities in Shanghai; the following prices were observed:

GM Excelle List Price RMB 153,800 (C$22,618)
GM SRV List Price RMB 79,800 (C$11,735)
GM Aveo List Price RMB 96,900 (C$14,250)
GM Lacrosse List Price RMB 269,800 (C$39,677)

 It was interesting to learn that 100% of GM's production output in pre-sold in China; there clearly is a temptation for GM for the consideration of price increases for the foreseeable future. In the April 15, 2007 edition of the Shanghai Daily, a variety of prices for what is observed to be strong market for the resale of passenger vehicles. A sample of these advertised prices is offered for consideration:

VW Passat (2002) RMB145,000 (C$21,323)
GM GL8 Van (2003) RMB 205,000 (C$30,147)
GM Excelle (2004) RMB 118,000 (C$17,353)
Audi A6 (2000) RMB 258,000 (C$37,941)
Mazda 323 (2006) RMB 115,000 (C$ 16,911)
 

 GM and Volkswagen appear to have established themselves well as suppliers to the Chinese domestic market due to decisions by their management to negotiate joint ventures agreements with Chinese well before other international automotive manufacturers.

 At the recent 12th International Automotive & Manufacturing Exhibition (held in Shanghai April 20th, 2007) the presence of the joint venture automotive manufacturers were evident. General Motors Corp. displayed 30 production and concept vehicles under the Cadillac, Buick, Saab and Opel brands. Volkswagen AG displayed 26 production models including the Chinese-made CrossPolo, and the Magotan sedan. Toyota Motor Corp. displayed 31 vehicles including the Chinese-made Crown, Camry, Prius and Corolla.

 The Chinese manufacturers also made their mark. Shanghai Automotive Industry Corp (which has partnered with GM, VW and most recently Rover) or SAIC showcased its self-brand models the Roewe 750 (that uses fuel cell technology) and its new Sangyong Kyron. Chery Automobile Co. Ltd. (Anhui Province) introduced 10 new models that included a sport sedan, a hybrid (the A5BSG), a fuel cell prototype and a coupe. Great Wall Motor Co. Ltd. Released 10 new models to maintain its profile as China's largest manufacturer of SUV.

 Stalwart manufacturer China FAW Group (Changchun) was also present. FAW is known throughout China as a manufacturer of trucks and buses but has created its own research facilities for the development of passenger cars for the Chinese domestic market. At the show it unveiled its new CA7460 "Unmanned car". The unmanned vehicle can cruise at 130km/h and has a peak speed of 170km/h for passing other cars in highway conditions. Another notable introduction was the CA7202 sedan that is branded as the company's ‘red-flag' car. The CA7202 is a reminder of the stately cars of Mercedes Benz of the past which is now offered to Chinese consumers of the present. Other manufacturers present included Mercedes-Benz, Ford Motor Corp (with its Chinese partner Chang'an Group), Porsche AG, Kia, Volvo, Hyundai, Mitsubishi, Honda, Nissan Motor Corp., Skoda, and BMW to name a few.

 Traditionally all buses used in China were produced by foreign manufacturers. More recently a significant amount of Chinese domestic demand for buses has been met by a growing number of Chinese based manufacturers. Production has been strong enough to permit for the export of units to foreign markets in recent years. In 2005 China produced 38,900 large-size buses and 55,900 buses valued at RMB 30 Billion. In 2005 China export 5,756 buses; which grew to 11,488 units in 2006.

 Higer Bus Company Limited (Jiangsu, China). Established in 1998, Higer Bus has a capitalization of RMB 180 million and license from the Chinese government for production of 18,000 complete bus and chassis per year. Higer was noted in 2006 for exporting 800 buses to the Middle Eastern government of Qatar.

 Yutong - Zhengzhou Yutong Group (Zhengzhou City, China) Yutong produces covered buses, construction machinery, special vehicles, parts and components. The total assets of Yutong Group currently stand at RMD 4.9 billion. Yutong was noted in 2006 for exporting 1,300+ buses to the other side of world for use by the government in Cuba.

 King Long - Suzhou Xiamen Kinglong (Xiamen, China) Suzhou Xiamen King Long Buses was founded in 1980. Today it operates two plants, one in Xiamen and the other in Shaoxing. The company works with an asset base of RMB 6 Billion. King Long has been notable in 2006 for its increase in exports, which grew by 409% (over 2005 performance). The 2006 export sales involve sales of 1,548 buses valued at RMB 82 Million

 There are a significant number of other Chinese manufacturers operating in China that are discussed in this paper. JAC, FAW and Jin Bei are all successfully manufacturing buses for the Chinese domestic markets.

 The manufacturing of trucking in China is dominated by Chinese domestic manufacturers and well as by several Chinese based joint venture manufacturers. The key Chinese manufacturers include are FAW and JAC. Other truck makers include DFAC/Dong Feng (JV with Honda), JinBei (JV with Toyota), as well as Forland (JV with Hybeko of Sweden).

 In the year 1956, China's Central Committee (with assistance from the former Soviet Union), initiated construction  of China's first automotive manufacturing capabilities. Known at that time as China First Automotive Works and now known as FAW, this sprawling car and truck manufacturer is headquartered in Changchun.

 In contrast to its early days of producing a single model of medium-duty truck, FAW now produces hundreds of models of light, medium, and heavy-duty trucks. Overall annual production volume currently stands at one million units. FAW has undergone a corporate restructuring process that has taken as an organization from one that has the corporate infrastructure of a traditional state enterprise to one that has the corporate structure of a profitable and diversified organization. Some of its current models of trucks include such models as The CA5313: Type 6-cylinders in line, 4-stroke, water-cooled, direct injection, turbocharged, air-to-air intercooled; The CA1083 Type 4-cylinder in line, 4-stroke, water-cooled, direct injection, turbocharged, air-to-air intercooled; The CA1093 Type 6-cylinders in line, 4-stroke, water-cooled, direct injection, turbocharged

 Anhui Jianghuai Automobile Co., Ltd. (or JAC) (Anhui Province), was originally called Hefei Jianghuai Automobile Factory (1964). The company was re-founded 1999, and now employs more than 8,500 people and has grown to possess an asset base of RMB 6.2 billion. The main products of JAC include the manufacture of bus chassis, trucks, MPVs, engines, gear-boxs, as well as automotive components. JAC currently has an annual production capacity of more than 200,000 vehicles.

 There is a large variety of brands of motorized scooters sold throughout China. Brands such as Xin Ri, Gamma, Tank abound the urban landscapes of Beijing and more notably Shanghai. What is striking is the fact that the retail selling prices for domestic scooters, whether gas or electric driven, is often less costly that purchases of bicycles (the traditional preferred form of transportation in urban centers in China). On Sunday, April 22, 2007 the author attending three different dealerships whose pricing were strikingly similar. The following prices were observed to have such specifications as the Xin Ri Electric Driven Scooter List RMB 2,880 (C$423) or Gamma Gas Driven Scooter List RMD 4,200 (C$618). It was interesting to note that the sale of bicycles in the same dealerships were offered at price at least 10% to 20% higher than the scooters and mopeds.

 The State of the Chinese Automotive Sector & Exports: As Minister Han Lei eloquently stated; "China must ‘step up' on the issue of technology". Many of the economies in the world have been successfully built upon the economics of exports of automotive products. Japan and South Korea are recently examples of ability of this sector to have far reaching impacts upon the economy of any given country. China is no exception. China has improved the standard of living for its people by 12% in the first quarter of 2007 due to the fact that it has emerged as an export of goods to the world. China today is exploiting low cost product as the engine of this export economy which is indeed workable in the short term. However, for long term advantage for its economy China must move from the spectrum of low cost production to one of high value high technology production. The state of the automotive sector is one sector where this transition is clearly underway. It is interesting that it is the bus manufacturers that are leading the way for exports of products. Higer/Long King, Yutong, and FAW are leading the way for China. Nearly a dozen manufacturers across China are engaged in building modern new production facilities, creating ambitious new product development programs as well as developing distribution networks on a global scale. That is not to say that these key Chinese manufacturers are ready to sell products yet to North America. Today they are actively engaged in meeting the domestic demand in China. It will take time for these manufacturers to recognize the differing needs and tastes of demanding consumers outside of China. There exist language barriers. Most importantly these key Chinese manufacturers need to learn to stop competing based upon price by turning their attention to meeting consumer wants, by improving product quality and by introducing new technologies that are unique in the world. The efforts of FAW with its CA7460 for the perfection of the designed of its "unmanned car" is a breath taking step along the path for such high technology production. These manufacturers will need to expend resources in the development of the branding of their products; not just in China but on a global scale.

 Branding is not natural to the Chinese way of thinking. This is demonstrated in the manner that manufacturer FAW identifies its flagship sedan or "red-flag" sedan as model CA7202. The 7202 is a beautiful car; but one that few in the world would recognize as an identifiable brand. As the only saying goes "You only have one chance to make a first impression"; so much work needs to be done with respect to branding. Is China moving to a technology export based economy? The answer is a resounding yes. The path is set. The pace is one of frenzied energy.

 It is my belief and assertion that the world will see Chinese produced automotive product arrive at our door step within the next ten years. It is also likely that these products will initially arrive offering the key features and benefits that will include low pricing; but this market entry strategy will be replaced in short order by one where products will feature unique technologies that are compelling and not subject to substitution. The concept of my car driving me to work while I read my morning newspaper is one that put the hairs on the back of neck stand on end....and one I sincerely look forward to.