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What Are Borgward's Odds of Success in China?

Date:03-30 16:29 Authour:Wu Yue

What Are Borgward's Odds of Success in China?

BX7 has already been produced locally and will be officially launched at Auto Beijing next month.

BORGWARD's Miyun plant in Beijing has a production capacity of 160,000 units in Phase I and may reach 360,000 units at most in Phase II. There are 100 BORGWARD dealers now, which will increase to 120 in 2016 and 200 in 2017. It is also reported that after BX7, BORGWARD will also launch a compact SUV (BX5) and a BX7 crossover (BX7TS) within the year. 

I first saw BORGWARD BX7 at the Frankfurt Motor Show last year. Before that I only knew that BORGWARD was a reviving German auto brand with a history of nearly 100 years. A tough mid-size SUV, the model features genuine German design and craftsmanship, speaks of luxury and power, and has a tail that's similar to Porsche Cayenne.The vehicle displayed on the video looked wild and graceful.

BORGWARD has implemented its China strategy in strict confidentiality. It wasn't until two weeks ago when BORGWARD grandly presented BX7 at its Beijing HeadquartersBORGWARD China that Chinese media first learnt that the model has already been produced locally and will be officially launched at Auto Beijing next month. BORGWARD's Miyun plant in Beijing has a production capacity of 160,000 units in Phase I and may reach 360,000 units at most in Phase II. There are 100 BORGWARD dealers now, which will increase to 120 in 2016 and 200 in 2017. It is also reported that after BX7, BORGWARDwill also launch a compact SUV (BX5) and a BX7 crossover (BX7TS) within the year.

BORGWARD Group's CEO Ulrich Walker is familiar to Chinese media. He used to be chairman of Daimler Northeast Asia and is now also CEO of BORGWARD China.

But BORGWARD has been evading a sensitive topic - its actual controller is BAIC FOTON. When BX7 was premiered, no BAIC FOTON executive was present and it wasn't mentioned in the news release either. That's understandable. One is a time-honored German luxury car brand that's making a comeback, and the other is a Chinese commercial car maker. They have to keep a distance from each other just like JLR doesn't want to mention Tata (Indian automaker) and Chery and Volvo doesn't want to mention Geely.

But BORGWARD has to respond to media's doubts. In terms of capital, BAIC Foton has 100% equity in BORGWARD Group and the brand, the same as Geely's acquisition of Volvo. But unlike other locally produced luxury cars, BORGWARD hasn't been in the auto market for 50 years, so it has no brand history or technological accumulation whatsoever.Then what's the technological origin of its first model BX7 for its comeback? Is it able to operate independently regarding R&D, production, sales, service and branding? With the Phase I production capacity of 160,000 units in China, what are its odds of success in the country? These questions are all related with BORGWARD's brand positioning.

Brand positioning:

Explanation for "old car in new shell" and technological origin of BX7

According to the official statement of BORGWARD China, BORGWARD's brand positioning is "Accessible Premium". What does that mean? A person responsible inBORGWARD China cleverly hinted that they don't target the top three German auto brands as their competitors. Does that mean BORGWARD is a tier-2 luxury car? The top three brands in that sector in terms of sales volume were JLR, Lexus and Volvo in 2015, which sold 92,000 units, 86,000 units and 81,000 units respectively. Of course BORGWARD's brand positioning will eventually be decided by the market, but BX7 is indeed manufactured according to luxury standards.

An online media recently reported that BORGWARD BX7's prototype is Foton SauvanaSUV, and its 2.0T engine is the old Mitsubishi engine produced by BAIC Foton, so BX7 is an "old car in a new shell". It's known to all that BAIC Foton began to make deployments in the passenger car market 10 years ago, but it has had a very bumpy road, and both the production license and technological accumulation are not completely solved yet. Now that it joins hands with BORGWARD, does it dare deceive Chinese consumers with an "old car in a new shell"? If that were the case, Ulrich Walker would be an accomplice. Is it possible?

IBD asked Guo Tiefu, PR director of BORGWARD China, for confirmation and got three positive answers.

First, BORGWARD's revival project was initiated in 2005 and more than RMB10 billion has been spent over 10 years. With Germany's Stuttgart as the center, the brand has integrated global resources and developed the new BX7 with exquisite German craftsmanship. Members of BORGWARD's R&D team mostly come from luxury automakers, and BX7 is created in strict accordance with international luxury standards, ranging from interior materials and workmanship to chassis calibration and road test. The Miyun plant in Beijing is equipped with German equipment from head to toe in order to keep the uniform production standard for local production.

Second, BX7 adopts the monocoque body that is commonly adopted by mainstream SUVs today, but Foton Sauvana adopts the separate frame construction with chassis frame. The two structures are completely different (separate frame construction is a world-leading off-road chassis technology adopted by JEEP and Land Rover, but models of that structure developed by Chinese automakers are very low-end).

Third, BX7's engine is jointly developed by BORGWARD, Germany's FEV and Bosch. It has nothing to do with Mitsubishi and the two have completely different structures. Besides, BX7's engine is MQB while Sauvana's is MLB, indicating different design concepts.

These three answers point out the technological origin of BX7. Regarding BORGWARD's positioning as a luxury car, it aims at differentiated competition and its selling points include the most advanced telematics of German luxury cars and exceptional handling that cannot be found in Japanese luxury cars. BX7 is a "German wide-body smart SUV", which caters to Chinese consumers very well.

Fast deployment starting with high-end SUV market

But brand positioning has to be supported by products and sales volume is the ultimate criterion. There is no such thing as branding without market recognition. That BORGWARDchose China as the main battlefield for its brand revival is definitely related with BAIC Foton, but it cannot be denied that only the Chinese market, which boasts an immense capacity, can provide it with the chance of success. Product strategy is the key to entering this market.

BORGWARD wants to launch the first round of attack with intensive and fast launch of high-end SUVs, which demonstrates BORGWARD's and BAIC Foton's accurate grasp of the Chinese auto market. According to data provided by BORGWARD China, the growth rate of Chinese SUV market has risen from 28.7% to 54% in the past five years, while that of the sedan market only climbed from 0.2% to 0.8%, once hitting 11.7% in the best year.In 2015, SUV accounted for 28% of the Chinese auto market, which is expected to reach 38% in 2020.

Chen Weixu, executive vice president of BORGWARD China, was very frank about this - the key to a successful real estate project is position, and the key to a successful car is segment. In 2015, self-owned brands seized market share thanks to SUV, and both luxury automakers and general JV brands are fighting for the compact and mid-size SUV segment fiercely. VW and Skoda are stepping up efforts to make up for their weakness in mid-size SUV, and BORGWARD, leveraged on its German DNA, has chosen a perfect timing to bet on the SUV segment.

The next question is about BX7's price. "Accessible Premium" may have twofold meanings - it means "quasi luxury" from product perspective, and "affordable" from consumers' perspective. BORGWARD China has made a commitment to making their cars "more than worth the money". It must be interesting to make a list of the price of tier-2 mid-size luxury SUVs and guess the starting price of BX7.

References from Qoros and DS

IBORGWARD does everything right, whether brand positioning, product launch or pricing strategy, is it sure to make inroads into the market? For a brand that has almost zero brand recognition in China, BORGWARD has two negative examples to learn from - Qoros and DS.

Qoros is an "international auto brand from China" created by a self-owned brand in cooperation with an international partner that's not engaged in the auto industry, and it isn't successful. Qoros' current dilemma stems from two mistakes. First, it positions the brand as "New Premium" (which cannot be translated as new luxury or new high-class because that doesn't consist with Qoros' identity) and targets VW, Toyota and GM. This is fine from the perspective of enhancing self-owned brand's manufacturing quality. However, its first model Qoros 3 Sedan was priced in reference to same-class models of those tier-1 international brands, so it was doomed to fail. Second, Qoros' product strategy doesn't precisely meet the changing demand in Chinese auto market. As a new self-owned brand, Qoros' first model is a compact sedan that's in a highly competitive segment instead of an SUV thatalready showed signs of eruptive growth at that time. Years have passed when Qoros decided to launch an SUV because its sedan was hardly sellable.

DS is a high-end brand of Citroen, which also made two mistakes - launching a sedan first instead of an SUV and taking aggressive steps (Phase I production capacity of 200,000 units) while its brand recognition was very low. Citroen eventually paid a high price. The pricing strategy for DS was correct. The first B-Class sedan (DS5) gave a boost toCitroen's sales volume in 2014 for its premium quality and a starting price of slightly more than RMB200,000, but it didn't continue the momentum. The SUV DS6 launched a year later had a starting price of only RMB193,900, but competitors in the same price level were too aggressive. The current compact sedan DS5LS has a starting price of only RMB149,800, but still suffers from poor sales.

In comparison with Qoros and DS, it's ok for BORGWARD to position the brand as "Accessible Premium", but pricing is a big headache, and the Phase I production capacity of 160,000 units may be too optimistic. Although BORGWARD "used to be a luxury brand", it hasn't been in the auto market for 50+ years and is a total stranger for Chinese consumers now. In Chinese auto market, no new brand taking the high-end route has ever succeeded.It's actually the same in the global market, but BORGWARD is still quite renowned in Germany. The good thing is that BORGWARD has its luxury origin and history to rely on, and its product strategy is accurate and fast, so the question now is whether it will be "hard on itself" in pricing. The latest trend in Chinese auto market is "high-end brand but low price", and BORGWARD has to follow this trend in order to be successful.

BAIC Foton behind the scene; BORGWARD brand "de-Fotonized"

BORGWARD China doesn't need to be evasive about BAIC Foton, the investor whose origin doesn't match this German luxury brand, because it cannot stop the media's imagination and conjecture. Everybody understands that BAIC Foton is the decision maker regarding the company's major strategic decisions, but on the operating level, it should giveBORGWARD China more independence, and should "de-Fotonize" it as much as possible on the brand level. That's the key to the success of all locally produced luxury cars.

Li Shufu said "Geely is Geely, Volvo is Volvo", so he saved Volvo's brand value; he said "let the tiger run back to the mountain", and Volvo successfully turned the tables. Li Shufu's wisdom and capability is also reflected in his successful use of local resources, so he turned "Geely Volvo", a name with Chinese characteristics, into "Asia Pacific Volvo". BAIC Foton is equally flexible. The full name of BORGWARD's Miyun plant is "Beijing BORGWARD Automobile Co., Ltd.", so the tail logo on BORGWARD models is "BORGWARD" according to Chinese laws. This is very important because in China, the higher-end a vehicle is, the more face the owner has.

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