A man walks in front of an ad for a Daimler truck at an exhibition in Taiyuan, Shanxi province. Foreign truck companies are forming joint ventures in China to meet the demand from the world's largest truck market. Hu Yuanjia / for China Daily

Foreign truck companies look for local partners to make a heavy impact in China

After years of unsuccessful attempts to rumble into China, 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 miniscule 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," says Eric Labat, president of Volvo Group Trucks China.

"The imported truck companies have the advantage of advanced technology, but the 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 second-largest heavy-duty truck brand in the world. More than 95 percent of the trucks it builds are above 16 tons, and are sold and serviced in more than 140 countries.

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 marquee 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 was supported by the government as a strategic industry as early as 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 - FAW, Dongfeng and Foton - start from 200,000 yuan ($31,920; 24,600 euros), a Volvo truck can cost 900,000 yuan.

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Labat says 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 that Volvo doesn't have a market share of at least 10 percent, he says.

As the economy in Europe and the US shows no signs of a quick recovery, the Chinese market becomes even more appealing to international truck brands. In terms of volume, the Chinese market is the size of the European, US and Japanese markets combined, says China Association of Automobile Manufacturers.

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

Last month, sources close to the company say, after six years' negotiation, the joint venture between Dongfeng Motor Corp and Volvo was approved by the government.

Volvo hasn't made an official announcement, but it has already done a partnership deal with Dongfeng Nissan Diesel Motor Co, who said Volvo was working to expand the partnership with Dongfeng.

Chinese regulations prevent foreign companies from holding more than 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, 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 to come. Until 2006, when the cooperation with Steyr ended, China produced 150,000 Steyr trucks - about 120,000 are still being used.

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, a year-on-year increase of 19 percent. The company attributes a big part of this achievement to the performance of 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, says Xie Guangyao, editor-in-chief of CVWorld, a major commercial vehicle website in China. He says 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 says. "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," says 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, outlines 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 the 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 says. "It took more than a decade (for Foton) to establish such a position, so we decide to develop the partnership with it."

The joint venture will build up 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," says Albrecht.

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

The market trend is for trucks with stronger engines, says 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 says.

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

Alas, almost all foreign truck makers are trying to grab the medium-end market share, 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 financial crisis in 2008, the Chinese government injected vast amounts of capital into the market and encouraged investment in major construction. The truck industry is believed to have received a huge boost from this policy, but that momentum is not sustainable.

"We have to upgrade the products and services to safeguard our future growth," says Wu, adding that the joint venture will re-launch the more technologically advanced Auman GTL model in 2014.

Managers from the foreign side of the partnership are more optimistic. Albrecht estimated that the market will bounce back in the second half of next year, and "in the long term we still expect some growth, although not as bullish".

To cope best in an uncertain future, it is essential for young joint ventures to handle the collision of different corporate cultures and ideas, says Wu.

"The two sides have their own advantages, but they share the same mission. So the core problem is to find a good way to communicate."

wangchao@chinadaily.com.cn

(China Daily 10/19/2012 page12)