Truck firms revving up

Foreign companies look for local partners to make their presence felt in China

After years of unsuccessful attempts to enter the Chinese market, foreign truck brands are changing direction in a bid to drive up sales. They are looking to partner with local truck companies and launch lower-end product lines.

While foreign car brands continue to increase their market share in China to almost 70 percent, foreign truck brands have secured a mere 3 percent. In 2010, among the 1 million trucks sold in China, only 10,000 were foreign brands, 1 percent of the market volume.

"Ten years ago, the Chinese market was an export market, but today we think it is another home market," said Eric Labat, president of Volvo Group Trucks China.

"Imported truck companies have the advantage of advanced technology, but domestic truck manufacturers have been developing very fast over the past 10 years. Volvo is continuously adapting products, services and networks to the changing demands."

Volvo Trucks, headquartered in Gothenburg, Sweden, is the world's second-largest heavy-duty truck brand. More than 95 percent of the trucks it builds are above 16 metric tons, and are sold and serviced in more than 140 countries and regions.

But since the Chinese government opened the door to foreign auto manufacturers in the 1980s, foreign truck brands have taken a different route from passenger cars to enter the country.

Western marque names quickly grabbed the wheel in car joint ventures and gained tremendous success in the Chinese market. This wasn't possible for truck builders. Truck manufacturing has been supported by the government as a strategic industry since the 1950s, and had grown into a strong industry before foreign brands arrived.

They couldn't break into the huge market as their vehicles were too expensive for Chinese customers and too technologically advanced for their needs.

The situation remains the same today. While the price of heavy-duty trucks from major Chinese truck companies such as FAW, Dongfeng and Foton starts from 200,000 yuan ($31,920), a Volvo truck can cost 900,000 yuan.

Labat said the Chinese market is really challenging to imported brands. "If we sell several thousand trucks, it is an average market, but if you consider the huge potential in the Chinese market, the number is not big enough."

This is the only market in the world in which Volvo doesn't have a share of at least 10 percent, he said.

As the European and US economies show no signs of a quick recovery, the Chinese market is becoming even more appealing to foreign truck brands. In terms of volume, the Chinese market is the size of the European, US and Japanese markets combined, according to the China Association of Automobile Manufacturers.

This year, however, could end up being a turning point for foreign truck brands in China.

Last month, according to sources close to the company, after negotiations lasting six years, the joint venture between Dongfeng Motor Corp and Volvo received government approval.

Volvo hasn't made an official announcement, but it has already agreed a partnership deal with Dongfeng Nissan Diesel Motor Co, which said Volvo was working to expand the partnership with Dongfeng. Chinese regulations prevent foreign companies from holding more than a 50 percent share in a joint venture.

There are foreign forerunners in running big trucks into China. Steyr, a heavy-duty truck brand belonging to German manufacturer MAN, has gained success and a weighty reputation in China.

In 1983, China National Heavy Duty Truck Group introduced the Steyr 91-series, as the standard blueprint for Chinese heavy-duty trucks. Until 2006, when the cooperation with Steyr ended, China produced 150,000 Steyr trucks - around 120,000 are still in use.

MAN is still benefiting from its cooperation in that earlier project. In 2011, it sold 155,520 trucks globally, with revenue of 12.6 billion euros ($16.52 billion), a year-on-year increase of 19 percent. The company attributes a major part of this achievement to its performance in the Chinese and Latin American markets.

MAN is now involved in several partnerships with Chinese companies relating to driving cabs and chassis.

But as Chinese truck brands get stronger, forming a partnership has become harder.

After a decade of stagnant sales, Western brands realize that simply exporting their products to this market in general is no longer viable. Consequently, they have lowered their sights to target the medium-end section of the market.

They are moving on the right track, said Xie Guangyao, editor-in-chief of CVWorld, a major commercial vehicle website in China. He said the Chinese truck market is a pyramid. On top are the European brands, then the Japanese, and at the bottom are the Chinese trucks, leaving the medium-level market relatively empty.

"At the top are very professional and very demanding customers asking for good products," Xie said.

"But this market is not big enough for these foreign brands. To move on they need to offer affordable products to Chinese customers."

This will certainly benefit Chinese firms, as it will help to upgrade low-end products and bring higher profit margins.

For example, a Foton truck costs on average 220,000 yuan. After being fitted with Mercedes-Benz engines, the price would be much higher.

Foreign truck manufacturers cannot compromise on safety and quality, on which their reputation rests, but they can elsewhere by making the essential component of the vehicles cheaper - the engine.

Assembling a truck is not expensive, and is little reflected in the total cost of a product. Companies cannot make much profit from it. But a considerable amount comes from key components such as engines.

Generally, a Chinese-made engine accounts for 20 to 25 percent of a truck's cost. Using an imported engine would make it 30 percent.

Another international heavyweight, Daimler Trucks, sold 6,000 trucks in China last year, representing about 50 percent of the high-end truck market.

Last year, its joint venture with Beiqi Foton Motor Co was approved by the Chinese government, and they have started to build an engine plant. The major products of Foton are Auman heavy-duty trucks and Mercedes-Benz OM 457 heavy-duty engines.

Mercedes has joint ventures in India, Japan, North America, Western Europe and Latin America, but none of the products are suitable in China, as different markets have different requirements and demands.

"It's very difficult to participate in the Chinese market if we don't have the proper products," said Stefan Albrecht, executive vice-president of Beijing Foton Daimler Automotive Co.

"So we have two options - either we create our own brand in this country, like we did in India, or we find a local partner."

In the joint venture, Foton contributes the brand and business, and Daimler the technology, engine, cash and management skills.

Wu Yuejun, president of Beijing Foton Daimler Automotive Co, outlined the mutual advantages: "Daimler trucks now have a lower-end product line, which will not compete against its traditional high-end market. Through this joint venture, Daimler now accelerates its steps into an emerging market."

The vehicle produced by the joint venture will be medium-end, cheaper and with a shorter lifespan than a high-end truck.

"It is a very good choice for Daimler because Foton is a top player in China," Albrecht said. "It took more than a decade (for Foton) to establish such a position, so we decided to develop the partnership with it."

The joint venture will build an engine plant in China expected to go into production around 2015. Until then, engines will be imported from Germany.

"By developing with the Chinese joint venture, we will be the leader of the 'mixed trucks' sector," said Albrecht.

Customers will be able to choose between models with Chinese or Mercedes-Benz engines.

The market trend is for trucks with stronger engines, said Wu. "It puts higher demand on engine manufacturers as the market gradually moves upward, and the German engine will have more followers in the medium- and high-end market," he said.

The number of high-end customers is also growing, Wu added. They come from large State enterprises, established private enterprises, and some logistics companies, transporting dangerous or time-sensitive goods that cannot afford breakdowns.

However, almost all foreign truck makers are trying to grab a share of the medium-end market, and analysts foresee fierce competition.

To get a head start on the competition, Foton-Daimler is investing 500 million yuan to establish an R&D center in China.

The international brands also face another challenge.

To protect the economy during the global financial crisis in 2008, the Chinese government injected vast amounts of capital into the market and encouraged investment in major construction projects. The truck industry is believed to have received a huge boost from this policy, but that momentum is not sustainable.

wangchao@chinadaily.com.cn

(China Daily 10/20/2012 page10)