Back in 1992, I asked an executive at a European truck maker about his company’s strategy for China. “It’s simple. No one wants to be fingered as the guy who lost the China market. So, we err on the side of optimism.”
But China is not a forgiving to those who wear rose-tinted glasses.
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The company in 1993 began pursuit of a joint venture with China National Heavy Duty Truck Corporation. Original plans were ambitious. Along with the State-owned Chinese partner, it would invest $250 million to build new trucks for China. Just as Shanghai Volkswagen dominated the car market, the thinking went, so would the European company and its partner set the pace in heavy trucks.
Today, eight years and thousands of hours of negotiations later, the partners are still trying to strike a deal.
What happened? Ask anyone familiar with the joint venture talks, and you’ll get the same litany of reasons for the failure. Most point to shortages of money or bureaucratic in fighting. The Chinese partner, at one point, was found to be bankrupt. Its ownership changed from the central government to the provincial government. The Europeans rejected buying into a partner laden with debt, whoever the owner. And so on.
It’s not unusual for joint venture negotiations to take years in China. GM bargained with Shanghai for four years to get its Buick program accepted. Volkswagen and American Motors (Jeep) required five. But eight years? There must be, skeptics would say, something more to the story.
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By GlobalData|
“From the beginning the European company was too optimistic about the market” |
In my book, there’s good reason the venture never got going. From the beginning the European company was too optimistic about the market. The firm is not producing trucks in China because, at least for now, there’s thin demand for high quality, low emission, safe trucks – the kinds of trucks on which Europeans build their reputation.
China this year will sell more than 100,000 heavy trucks. Ninety-eight percent of those trucks carry a sticker price under $30,000. They are driven by 1980s era power plants. Little regard is given to cab interiors because the drivers are hired for less than $5 a day. Buyers’ criteria are price, price, and price.
Europeans cringes at the notion of selling on price. Given China’s size and (future) potential, it’s understandable that company envisioned massive demand for its heavy trucks. But China’s simply not there yet.
This experience points to a larger phenomenon of mis-reading the China market.
European truck and bus makers are not alone. Peugeot failed to sell more than 10,000 units per year since starting operations in 1986 and was forced to pull out in 1998. Beijing Jeep, with capacity to build 50,000 units a year, will be lucky to sell 5,000 Cherokees this year. Nissan Diesel struggles to sell a few hundred units from its five year-old joint venture with Dongfeng Motors.
Not everyone fares poorly, of course. Some companies do extremely well in China. Since introducing the Accord in late 1999, Honda has rushed production ramp-ups to meet demand. Buyers of the Accord today must wait three months for delivery. And Volkswagen, the market leader, will easily sell 300,000 cars in China this year.
The point is that the market does not serve all comers equally. Chinese consumers seem to act on a whim, rewarding some while punishing others. When it comes to predicting demand for your product , China bristles with mixed signals. But there are some scraps of method to the madness. From ten years of experience in the trenches, I offer four China market characteristics you can count on.
- People Make the Rules. When it comes to regulations, China is at once unpredictable and malleable. In December 1999, Beijing suddenly declared a ban on diesels in the city. From January 2000, no car or truck powered by a diesel could be registered in the capital. This declaration sent shock waves throughout the diesel engine industry. Would other cities soon follow Beijing’s lead? Was this the beginning of the end for diesels? What about the hundreds of million invested in diesel factories nationwide? In March, 2000 foreign and Chinese diesel engine makers formed a consortium to educate people in China’s government about the costs and benefits of modern, environmentally friendly diesels. With this new knowledge, several cities have rolled back plans to phase out diesels. Diesels are allowed even to run on Beijing streets, provided they are not registered inside city limits. This month Volkswagen announced plans to fit diesels into new Passats and Boras produced in 2002. Lesson: The powerful people who make rules that shape demand can change their minds.
- Unusually Rich is Not Unusual.
“Chinese entrepreneurs give a whole new meaning to the term concentration of wealth. Extended families share resources to buy garages full of cars”
Chinese entrepreneurs give a whole new meaning to the term concentration of wealth. Extended families share resources to buy garages full of cars. And they want to acquire only the top of the line. Of the 5,000 Mercedes that will be sold in China this year, 80 percent will be S-Class. Chinese merchants snub their noses at anything less. One of four cars bought in China this year will carry a sticker price above $30,000. This is occurring in a country where the per capita GDP in less than $1,000! Twenty five percent of the market is paying cash, today, for top of the line Audis, Buicks, Passats and Accords. At the Audi joint venture, which is having a record sales year, the number one concern is whether relatively affordable prices ($40-75,000) might be diluting the brand’s prestige. In what other market in the world will you find comparable demand for high-end cars as a percentage of the total market? No other country is like it. China’s new economy is giving full liberties to enterprising individuals.
- There are No Sweeping Conclusions. Chairman Mao used to say: To win the revolution, take the countryside and surround the big cities. That was another way of saying work from the ground up. Concentrations of wealth are spread unevenly and unexpectedly across China. So are customers. In fact, very few buyer attributes follow a consistent pattern in China’s car and truck market. It’s better to think of China as a collection of disparate regional markets, each with its own set of market characteristics. Beijing young professionals show a budding interest in SUVs like the Cherokee and Blazer. Their counterparts in the more urbane city of Shanghai, however, look with disdain on off-road vehicles. Santana is overwhelmingly the taxi of choice in the Shandong, Hebei and Jiangsu. But drivers in Guangdong flatly reject the Santana in favor of the more modern-looking Jetta. When it comes to commercial vehicles, there’s a tiny sprinkling of buyers who will pay top dollar for top value. Most go on price. So after selling a $150,000 bus to one customer in Xian, be careful about extrapolating sales across the country. Volvo Truck, Nissan Diesel and Mercedes Benz have all learned this lesson.
- Watch What You Hear. JD Power and Associate has taught the auto industry the power of customer opinions. In China, it gets dicey because what the customers says may not always be in line with what he really thinks or the action he takes. It’s culturally acceptable to say one thing and mean another. I’ve asked Chinese from Changchun to Sichuan what they think of Japanese cars. To a person practically, they’ve shaken their heads and declared their strong preference for American and German makes. “Japanese cars are too small and not stylish, they say. We like big, strong cars.” Yet, one of three cars sold in China this year will be a Japanese make. At the point of purchase, economy, reliability and value prevail over the anti-Japanese rhetoric you hear nationwide. Another common mistake is to assume perceptions aren’t subject to change. Mitusbishi Pajero and Jeep Cherokee offer a good illustration. In the mid-1990s, Cherokee dominated the SUV market, selling 25-30,000 units a year. Mitsubishi struggled to peddle a few hundred Pajeros from its humble joint venture in south-central China. Yesterday’s customers credited Cherokee’s rugged looks, and strong brand name as keys to its success. Today the tables are turned. Mitsubishi controls more than half the market and Beijing Jeep is fighting for survival. Even though the products did not change much, customers now credit Pajero with the good looks and reputable brand name – this despite the fact that earlier this year Mitsubishi had to recall thousands of Pajeros for brake failure.
Global auto makers are perplexed by find these inconsistencies in the market place. But once you recall that China is a just-emerging market, with a short history and mind-altering scope for growth, China’s unpredictable markets become a little easier to read. Just a little.
Michael J. Dunne
November 2001
Automotive Resources Asia (www.auto-resources-asia.com)
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