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Camps Formed among Chinese Brands with Profit as Wedge

Date:09-13 12:57 Source:Zhongshang Automobile Authour:Zhu Shiyun

In July, although some brands boasted year-on-year growth of up to 500%, the overall market share of domestic brands declined to 39.5%, the lowest of the year and down by 6 percentage points compared to the beginning of last year. Last year Changan president Zhu Huarong raised the question: are the self-owned brands really competitive or sustainable despite the general rise? Who will be leading in the next twenty years? Perhpas the race has already started, whether you are aware of it or not.

Domestic brands have fallen into several camps in the past twenty-year competitive race.

Camps Formed among Chinese Brands with Profit as Wedge

After enduring a lonely twenty-year spell, Chinese automobile brands are battling for rankings, although the laurel winners are not yet clear. August saw not only a change in season, but more importantly, data on the performance of leading listed automobile manufacturers in the first half year. Domestic brands have fallen into several camps in the past twenty-year competitive race. (All performance data below refers pecifically to the domestic brands of automobile manufacturers).

Great Wall, Geely and Changan all realized positive growth in sales and profits, which is no surprise considering their consistent positive trends in recent years. BYD and GAC, on the other hand, are two dark horses. BYD, second to none in new energy market shares, saw a decline in sales on a year-on-year basis but a sharp twelve-fold increase in profits. Thanks to the hot-selling Trumpchi GS4, GAC’s domestic brand not only doubled its sales on a year-on-year basis but became a major profit contributor to the Group. BAIC and SAIC experienced a remarkable boom in end sales and a considerable rise in gross profit margin though no profit was claimed. Sadly, the performance of FAW and Dongfeng, two veteran domestic brands dating back to the 50s, was barely satisfactory.

In July, although some brands boasted year-on-year growth of up to 500%, the overall market share of domestic brands declined to 39.5%, the lowest of the year and down by 6 percentage points compared to the beginning of last year. Last year Changan president Zhu Huarong raised the question: are the self-owned brands really competitive or sustainable despite the general rise? Who will be leading in the next twenty years? Perhpas the race has already started, whether you are aware of it or not.

Camps Formed among Chinese Brands with Profit as Wedge

Note: the data in the table have been processed based on the annual reports of the listed manufacturers involved, on traders’ surveys, and on the variances between annual reports and previous data. They only serve as general indicators of manufacturer performance rather than providing a completely accurate overview.

All data refer to the performance of the manufacturers’ domestic brands with the exception of Dongfeng. All data concerning Dongfeng refer to Group performance other than sales figures.

Performance of the Domestic Brands of Nine Leading Listed Auto Manufacturers in the First Half of 2016

Steady legions planning strategic deployment

According to sales data released in the first half year, Changan and Great Wall sold 620,000 vehicles and 455,000 vehicles respectively, followed by Geely with 280,000. Nevertheless, with growth in both sales and price, Geely has obviously taken over the mantle of leading Chinese brand from the hands of Changan and Great Wall.

The financial statement for the first half year released by Geely showed turnover of RMB 18.089 billion Yuan, up by 31% on a year-on-year basis. Net profits of RMB 1.907 billion Yuan went to the parent company, up by 36% on a year-on-year basis. In terms of model structure, despite Chinese branded cars suffering a 16% year-on-year decline, Geely’s dominant models ruled the market. With sales of 107,000 in the first half year, its Dihao series contributed 38% to Geely’s sales. More remarkably, the Borui realized sales of 24,000 in the B class market with a year-on-year growth of 300%. Its SUV series, the GX7, Boyue and recently-launched Dihao GS realized overall sales of 40,000, up by 23% on a year-on-year basis. The Boyue, whose displacement is as high as 1.8L, demonstrated its market competitiveness even without favorable policy support.

With high priced models making up a higher percentage, the average price of Geely automobiles in the first half-year saw a 17% year-on-year rise. Profit premium margin (change of profit margin compared to the last period) and gross profit margin reached 13.4% and 17.7% respectively. As well as reaping the rewards from a high-end approach, Geely will also see a substantial increase in capacity in the second half-year. It is estimated that Baoji capacity will be launched in September, which will resolve any capacity problems relating to the Boyue. At the same time, the capacity of coastal bases is also rising in order to meet market demand for the Dihao GS and GL models. Moreover, Geely plans to expand its dealership network. A research agency believes that Geely’s average automobile unit price might very well increase from last year’s RMB 61,000 Yuan to RMB 80,000 Yuan, and the gross profit margin to 10% so as to embrace a virtuous cycle of simultaneous growth in both sales and price.

In contrast to Geely’s sharp growth, after rapid development in the last few years Changan and Great Wall are experiencing steady growth through the impact of scale and systems.

According to the first half-year financial statement released by Changan and research data from securities traders, Changan’s domestic brands realized sales of 620,000, up by 13% on a year-on-year basis. Survey of a trader showed investment gain from its joint brands took up over 98% of total profit . Overall net profit was RMB 5.49 billion Yuan this year, up by 7.98% on a year-on-year basis. At 2% of overall volume, domestic brands realized profits of about RMB 110 million Yuan. Trade research also showed that domestic brands have turned out profitable with compound revenue growth rate of exceeding 30% from 2012 to 2015. It was also predicted that they may very well keep rising and contribute further profits.

It is also worth noting that Changan has its thorough system structure to thank for a balanced product portfolio of cars, SUVs and MPVs.

From 2011 to 2015 Changan invested RMB 9.5 billion Yuan, 4.42% of its revenues, into R&D. An R&D process system has been established consisting of technical development, platform development, product development and product introduction, along with the product testing and verification system. According to its financial statement, Changan is speeding up its move from traditional automobiles into smart automobiles and R&D in new energy automobiles. Its “654” smartness strategy and “518” new energy strategy have worked out over 60 smartness techniques in three categories namely smart network, smart interaction and smart driving.

For Great Wall, the concern is more about whether the Haval can successfully make it to high-end level than about the duration of the SUV’s popularity.

Great Wall’s first half-year financial statement showed revenues of RMB 41.67 billion Yuan, up by 12.2% on a year-on-year basis. Net profit for the parent company saw year-on-year growth of 4.4% and reached RMB 4.93 billion Yuan. Boasting a high SUV premium, Great Wall is undoubtedly the most profitable Chinese brand.

In the first half year, Great Wall realized sales of 455,000, up by 8.8% on a year-on-year basis. The SUV share rose from 3.3% to 83.7%. The Haval H6 kept up its magically good performance and the high-end H7 and H8 were also making progress with total sales of 8000 for the former and a year-on-year growth of nearly 40% for the latter. With value core force moving upward, Great Wall is bound to secure a profitable performance.

Nevertheless, Great Wall is not free from anxiety. Its gross profit margin in the first half-year was 25.8%, almost two percentage points down on a year-on-year basis. The causes were declining “three rates” and rising R&D expenditure. Great Wall saw year-on-year growth of 10% in R&D expenditure in the first half-year and will devote more to this field in the future to keep its market competitiveness.

Merits-equipped charging brigade

Changan, Great Wall and Geely are leading the race, while the pursuers are speeding up, each with its distinctive merits.

The financial statement of GAC Group for the first half year was very eye-catching with total revenues of about RMB 21.4 billion Yuan, up by 87.15% on a year-on-year basis. Net profit going to the parent company was about RMB 3.981 billion Yuan, up by 127.49% on a year-on-year basis. With sales of 159,700 or a year-on-year growth of 143.47%, the Trumpchi brand served as a driving force of growth for the upstream and downstream support services on the industry chain and contributed tremendously to the Group’s performance boom.

Resulting from hot selling of the highly profitable Trumpchi GS4, capitalization for R&D expenditures by GAC Passenger Vehicle, and GAC Group covering partly R&D expenditure, actually amortized R&D cost for unit automobile was quite low. With this advantage, Trumpchi brand contributed RMB 3.17 billion Yuan to gross profit. A GAC model featuring R&D and production of domestic brands is gradually taking shape. Gross profit margin on GAC domestic brands rose by ten percentage points to 21% in the first half year and GAC appeared as a dark horse in the domestic brand race.

Like GAC, BYD was also a money-spinner. According to the financial statement, BYD realized revenues of RMB 24.2 billion Yuan with year-on-year growth of 36.5%, and a gross profit margin of 29.3% for its auto block with year-on-year growth of eight percentage points. It is clear that BYD is moving comprehensively into new energy automobiles. 180,000 vehicles were sold in the first half-year, down by 13% on a year-on-year basis. However, the drop was caused by a 29.61% decline in sales of traditional automobiles to 131,000. 49,000 new energy vehicles were sold with a year-on-year increase of 131%, making up 27% of domestic market share. In fact new energy automobiles contributed RMB 15.5 billion Yuan to BYD’s revenue, up 160% on a year-on-year basis. Corresponding to increasing sales of new energy automobiles, revenues from recharging batteries and photovoltaic business rose to RMB 4.2 billion Yuan with year-on-year growth of 76.6%. BYD is also expanding battery production capacity and speeding up battery R&D through various approaches, including engaging in Samsung as a shareholder and increasing investment.

While the manufacturers above are making money, the following are suffering losses. The domestic brands of SAIC and BAIC didn’t see a profit in the first half year, but their losses gave reason to remain hopeful.

According to trade research, SAIC domestic brands sold 109,700 automobiles in the first half year, up by 60.84% on a year-on-year basis, which resulted in revenues of RMB 10.9 billion Yuan or a year-on-year increase of 60%. Despite losses of RMB 1.87 billion Yuan, its gross profit margin grew by five percentage points to 14.1%. R&D covered by total cost made up a large share in the loss. A few days ago, vice president of SAIC and general manager of passenger vehicle company Wang Xiaoqiu remarked “Discounting R&D expenditure of about RMB 4 billion Yuan to RMB 5 billion Yuan, our domestic brands would have made profit of about RMB 200 million Yuan in manufacturing process this year. If manufacturing-related R&D expenditure (not capitalized) is calculated, domestic brands will see profits when annual sales reach around 400,000 to 500,000.”

Listing of Internet automobile Roewe RX5 showed the future direction of SAIC self-owned brands. SAIC reinforced its major layout by non-public fund raising amounting to RMB 15 billion Yuan. The fund was devoted to such areas as new energy automobiles, smart large-scale customizing, cutting-edge techniques, and automobile network, automobile services and automobile finance.

While SAIC is clear in its future direction, its counterpart BAIC sees the pending launch of second generation products as an upturn opportunity.

According to its financial statement, BAIC domestic brands realized sales of 203,000 in the first half year, up by 36.7% on a year-on-year basis and revenues of RMB 11.67 billion Yuan, up by 60%. Despite the growth higher automobile sales only resulted in bigger losses, since dealership expenditure almost doubled to RMB 1 billion Yuan on a year-on-year basis. Losses amounted to RMB 1.2 billion Yuan, up by 43.5% on a year-on-year basis.

Nevertheless, it’s worth noting that the profit margin of BAIC domestic brands showed some signs of improvement from -11.6% to -10.04%. More importantly, BAIC plans to launch its second generation of domestic brands with much better product quality and cost control, thus giving hopes of an upturn.

The backward and lost “50s”

In contrast to prosperity of the “young generation”, Chinese brands of the “older generation” are still looking for their way out.

FAW, a veteran domestic brand, is now under huge pressure. The performance of both FAW Car and FAW Xiali was far from satisfactory as shown in the financial statement of the first half-year. The former realized revenues of RMB 8.49 billion Yuan, a year-on-year drop of 38.31%, and lost RMB 830 million Yuan, a year-on-year drop of 613.64%. The latter realized revenue of RMB 1.003 billion Yuan, a year-on-year drop of 50.93%, and lost RMB 519million Yuan. The financial statement attributed declining performance to the fact that most sales of the first half year were dated models and cars and that the enterprise was losing competitiveness in the market.

However, FAW’s troubles are not limited to declining performance. Its top management has undergone significant changes. On August 11th, the director board and supervisor board of FAW Car received the resignations of president Xu Xianping, director Teng Tieji, supervisor board president Wang Yuchun, director Yang Yanchen and staff supervisor director Wang Lijun. On the same day, FAW Xiali announced the resignations of president Xu Xianping, director Jinyi, and supervisor board president Yang Yanchen. Meanwhile, the position of FAW Group general manager is still anxiously waiting for its new occupant.

What’s the way out? The market may get some hints from FAW’s capital movements. On August 21nd, FAW Xiali announced its intention to delist and sell its 15% equity in FAW Toyota to the dominant shareholder FAW Share-holding. This move is being seen as FAW Share-holding’s way of vitalizing “shell resources” and eliminating horizontal competition between FAW Car and FAW Xiali.

FAW is indeed in a tough situation while Dongfeng is making adjustments in an attemtp to find the way forward.

It has been almost two years since Dongfeng bought into PSA. However, whether this move will benefit the enterprise and its domestic brands is still hard to say. Poor performance of French brands this year has impacted Dongfeng. Financial statements showed that the Group’s revenue suffered a year-on-year decline of 13.2% to RMB 57.133 billion Yuan and net profits suffered a year-on-year decline of 1.8% to RMB 6.759 billion Yuan. Domestic brands saw year-on-year growth of 32.4% in sales to 334,000. Nevertheless, a research agency found from the financial statement that discounting revenues from joint operations and joint ventures, Dongfeng domestic brands lost over RMB 200 million Yuan this year in contrast to a profit of RMB 1.019 billion Yuan last year.

Performance of Dongfeng domestic brands also suffered from instability in terms of products with both commendable products such as the AX3 and A60 and weaker models such as the AX7 and A9. It’s believed that unsatisfactory R&D capability and systems are to blame for this unstable performance.

A research agency believes that Dongfeng PSA is facing a tremendous challenge which is familiar to rising domestic brands, while at the same time going through a painful de-stocking process. R&D expenditure saw a year-on-year rise of 70% to RMB 600 million Yuan and will hopefully catch up with other leading domestic auto brands (such as GAC Trumpchi and SAIC Roewe). Whether PSA and Dongfeng can take mutual advantage of their joint resources to enhance their product competitiveness will be a strategic issue both parties have to face.

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