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Behind the Polarization of Chinese Brands

Date:06-05 16:29 Authour:He Lun

——Auto Market Hotspots Q&A (128)

Behind the Polarization of Chinese Brands

The debate over the polarization of Chinese brand has been going on for 3 years. It has become one of the hottest topics in the auto industry. So what are the main reasons for this polarization?

Q: In April, some Chinese brands like Changan experienced sharp falls in their sales, but others like Geely, SAIC and GAC saw growing sales. What is the main reason for this clear polarization?  

A: The direct reason is that in April the passenger car market fell by 3.68% on a year-on-year basis. This makes it clear that the time when everyone could help themselves to a piece of a fast-growing market has come to an end, and that it is now time for a battle. What is more, consumers are now more discerning. So it is quickly apparent who is stronger and who is weaker, just as Warren Buffet says - “Only when the tide goes out do you discover who's been swimming naked.”

As a matter of fact, this polarization trend was already visible before the sales in April were revealed, so the identities of the stronger and the weaker do not come as a great suprise (see the article “Time for Chinese Brands to Go on Their Own”).

Behind the Polarization of Chinese Brands

Q: What do you think is the root cause for the polarization of Chinese brands?

A: At the Shanghai Auto Show this year, Li Anding - a senior auto commentator - and I had an in-depth discussion with an executive of Volkswagen. When we talked about Chinese brands, he asked which Chinese auto brands were expected to have the most promising future prospects. We both came up with the same answer – first of all, it would be private automakers like Geely and Great Wall, and then it would be local state-owned enterprises like SAIC and GAC. He argued that the leaders of large central enterprises should have a degree of overall awareness and global strategic vision befitting their high positions. We agreed, but we also pointed out that they were also more constrained by the state system. Local state-owned enterprises, on the other hand, are less constrained, and private enterprises are even freer and can do whatever is best for their interests. Moreover, these private automakers really have great global strategic vision. A typical entrepreneur is Li Shufu. When he decided to acquire Volvo, he was given little real support. Now look how well Geely is doing.  

Speaking of competitiveness, all say the competition among enterprises is essentially about talent. However, in the Chinese auto industry, the competition is really about the enterprise system. Of the three types of enterprise we just mentioned, which can attract the better talent? I think you already have the answer.

Q: From the perspective of product, what competitive advantages do Chinese brands have?

A: Good design and quality, and low cost and price. This is what I believe to be the competitive advantage of Chinese brands.

Q: It’s easy to understand “good design, good quality and low price”, but people are questioning “low cost”. Zhu Huarong, head of Changan Automobile Group, said, “local brands put a brave face on things, but few of them are really making money. People always say Chinese brands have cost competitiveness, but I don’t agree. Local brands are spending as much as world-class brands, but they sell at much lower prices.” What do you think?

A: As to whether Chinese brands can lower the cost and how they do it, I have actually talked about it many times (see the articles “Will this 7-seat Trumpchi GS8 Become a Hot Seller?”, “For Whom Is the Geely NL3 Sounding the Alarm?”, “The ‘Chinese Wolves’ Are Coming…”, and Is It Necessary for Volkswagen to Roll out a Low-price Car Brand?”). The answer is really complicated, but I can assure you this is no bluff. This question is worth digging and we cannot just jump to the conclusion.

The obvious facts are that the products of Geely, Great Wall and GAC are really good, and that SAIC Roewe is even the market leader in connected vehicle technology, but the prices of their products are 40% lower than those of the foreign-brand models in the same class. Last year Geely sold 1.07 million vehicles and Great Wall and 760 thousand, well below Changan’s sales of 1.28 million, but they made more profit than the latter (Changan made a total profit of RMB 660 million Yuan, indicating that it earned only RMB 516 Yuan per vehicle). GAC Trumpchi sold only 370 thousand vehicles last year, but it also made a much higher profit than Changan, which has the greatest economies of scale. SAIC is believed to be the automaker that spends most on product manufacturing in China, but with only 320 thousand vehicles sold last year, it began to make a profit. However, Changan no longer suffered a loss only when it sold 1.007 million vehicles in 2015.

Without their lower costs, Chinese automakers could not achieve profitability. Changan’s problem is that it also has relatively high costs. Its costs are almost as much as those of world-class brands, but its prices are much lower than theirs, leading to heavy losses or minimal profits.

Q: Why do Chinese brands have such widely differing costs?

A: As I have said in the articles mentioned above, one of the main reasons why Geely and GAC can achieve both high quality and low cost is that, in addition to possessing core technologies in calibration, testing and matching, they also carry out global procurement, and that their suppliers are not limited to German, Japanese and U.S. manufacturers. This strategy reduces their costs by over 30%.

Auto parts purchasing is the key to lowering the entire vehicle’s costs. World-renowned “cost killers” like Jose Ignacio Lopez and Carlos Ghosn have been highly successful in reducing costs from auto parts suppliers. But I’m afraid central enterprises won’t be able to repeat this success because their suppliers are also affiliates.

Many years ago, a central enterprise executive told the media that 70% of their suppliers were state-owned enterprises, whom they had to support, and that was why their costs were so high. They wanted to change this proportion to 30% in the future, but this turned out to be wishful thinking.

Take another central enterprise as an example. Most of its suppliers have been doing business with it since the beginning, forming very complicated benefit chains. If the company has 10 models, procurement will probably want to purchase rear mirrors from 10 different suppliers. Some technicians would even prefer to be a deputy chief of procurement rather than a deputy chief engineer of the whole company. The reason for that is not hard to guess. And of course, the result is inferior quality and higher cost. Sooner or later, this enterprise will pay the price.

Of course, as a central enterprise, it is limited in its options. Bearing so many traditional burdens and social responsibilities and constrained by its complex HR policies, it cannot always give top priority to its commercial values and sustainable development. This is an urgent issue that state-owned enterprises need to address as soon as p

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