Auto Industry

Lack of self-reliance

Brilliance China is (again) trying wean itself off its reliance on BMW

#2015…œ∫£≥µ’π£∫ª™≥ø∆˚≥µ

This Zhonghua SUV is being marketed as a top local brand

“Chinese milk is helping to suckle foreign children, making them big and strong.” Such are the words of Brilliance China President and CEO, Qi Yumin who has long argued that domestic car manufacturers risk being smothered by their powerful foreign joint venture partners. Unless Chinese carmakers can successfully develop their own independent brands, he believes they will struggle to thrive even in their home market.

It was an argument he began to develop when he left his post as deputy mayor of Dalian in Liaoning province to save Brilliance China from bankruptcy in 2006. He was espousing it again at the Shanghai Auto Show this April. And, if the domestic press is to be believed, he may still be banging the same drum when he reaches retirement age in 2018.

In recent weeks, China’s Business Review and financial news portal JRJ.com have both published long features on Brilliance China. Each sought to explain why the company seems to have been unable to stand on its own two feet, or forge an independent identity away from the loving embrace of BMW with whom it set up a joint venture in 2003.

In fact, Brilliance China has become a poster child for the domestic industry’s failure to cut the apron strings despite significant foreign technology transfers. At the end of 2014, domestic brands accounted for just 22.4% of sedan sales in China, their lowest-ever market share.

A survey of prospective buyers’ intentions, published by research house JD Power last year, also made depressing reading for China’s carmakers. This revealed that only 16% of potential buyers thought they would buy a domestic brand, down from 27% in 2013. And the biggest decrease was in the second and third tier cities where domestic car manufacturers have been targeting their sales.

As a result, nearly every single listed Chinese carmaker is entirely dependent on its joint venture operations to turn a profit. Brilliance China’s joint venture with BMW accounted for 102% of its net profits in 2014 (in case you are puzzled, this percentage indicates that – owing to losses from the Chinese side’s other carmaking ventures – the JV makes more profit than the parent).

Likewise, BAIC’s joint venture with Hyundai accounted for 143% of its 2014 profits, with its Mercedes-Benz joint venture contributing a further 39%. Its own brand division has been lossmaking for the past three financial years.

Chongqing Chang’an Auto fared slightly better. Its joint venture with Ford accounted for 103% of profits, while it own brands cost it 13%.

The domestic brands of Dongfeng Motor and Guangzhou Automobile Group (GAC) are also lossmaking. Their 2014 earnings were propped up by their respective Japanese joint ventures (with Nissan and Honda for Dongfeng and Toyota and Honda for GAC).

The picture is no different at China’s largest manufacturer by volume, SAIC Motor Corp. It derives nearly all of its profits from its joint ventures with General Motors and Volkswagen.

As Brilliance China’s Qi recently told China Daily, “The financial performance of Chinese brands last year was not good.” Qi attributes the weakness to the low amount of research and development (R&D) being invested in the development of domestic brands.

“We should look to the future,” he added, “because it is laying foundations, which will enable us to compete with our foreign peers.” And his words do seem to have been partially borne out by a second JD Power survey, which shows that Chinese domestic car brands are finally closing the quality gap with foreign competitors (safety concerns have long been a factor hindering the sales of local brands).

The firm’s 2014 rankings placed six domestic brands above the industry average in terms of how many problems owners experienced in the first two to six months after their purchase. They included: GAC’s Trumpchi, SAIC’s Roewe, Dongfeng’s Luxgen and Venucia, plus Brilliance’s Zhonghua.

This marked something of a turnaround for Zhonghua, which was stripped out of Brilliance China’s Shanghai and Hong Kong-listed entities in 2010 because it was consistently pushing them into lossmaking territory. However, the positive review from JD Power does not appear to have worked its way into the consciousness of the Chinese car-buying public just yet.

According to JRJ, Brilliance China only sold 137,900 Zhonghua vehicles in 2014, down 27% on 2013. The model accounted for less than 1% of all sales in China over the course of the year, slipping 12 places in the rankings to 35th position.

Business Review attributes Brilliance China’s difficulties to three main failings. Firstly, it says potential customers are simply overwhelmed by the sheer number of different Zhonghua models on offer. There are 15 in total. They include the H330 and H530, the V5, Zunchi, Kubao and Junjie.

The magazine says the Junjie is the most successful Zhonghua model of all, but has been undermined by derivative sub-brands such as the Junjie FRV and Junjie Cross.

Secondly, it says that while Brilliance China has a lot of Zhonghua models it has not been very good at updating them. “The company is still clinging to product plans established at the beginning of the century,” it says.

Thirdly, the magazine says the company’s design process is also a mess. It argues that Zhonghua models have lost their original distinctive style and now look like a knock-off BMW. “The H530 has been given a BMW coat, which makes it look like a shanzhai [counterfeit],” the magazine continues. “The name is just like the BMW530 and also has similar front-facing kidney grilles and angel eye headlights.” In 2014, it says Brilliance China sold 8,939 H530 cars, down 49% on 2013.

Last June, the company announced a revitalisation plan, which involves transforming the Zhonghua into a high-end domestic brand and developing JinBei minibuses into a global brand. It also has a new minivan, called the Huasong 7, which was launched late last year. All three are being developed using BMW technology. The Huasong 7, for example, has BMW’s four-cylinder N20 engine.

“I want to realise a dream,” Qi tells Business Review. “The chassis will be calibrated by Porsche, the engine provided by BMW and the exterior design inspired by Italy.”

It does not sound very Chinese and as Business Review points out, Brilliance China is simply relying on a “technological blood transfusion” from its joint venture partner. “In the past 10 years, Brilliance itself has made no headway,” the magazine concludes. “It continues to learn from BMW and it continues to lose.”

Both Business Review and JRJ query if Brilliance has the financial resources to even afford its share of the capital expenditure planned for the 50/50 joint venture. “Does Brilliance still have sufficient funds to supply blood to the JV?” wonders JRJ. If not, will that lead to the ceding of control to its German partner?

In the coming year, the joint venture plans to increase production capacity from 300,000 to 400,000 vehicles as it seeks to double the number of domestically made BMW models from three to six. Analysts believe the localisation ratio will rise from 53% in 2013 to 63% in 2016.

This rising localisation rate should help to offset the pricing pressure BMW is facing, partly thanks to a resurgent Mercedes-Benz and party because of China’s slowing economic growth, which is impacting car sales.

First quarter results came in below analysts’ forecasts pushing Brilliance China’s share price down 7% in a single day. The problem: sales grew 7% year-on-year but profits from the JV fell 43%.

BMW CFO Friedrich Eichiner said dealers were offering discounts of around 15% to shift BMWs compared to 10% a year ago. Analysts also believe the group gave its aggravated dealers (see WiC270 for more on this theme) a further Rmb1.5 billion in rebates during the quarter as well.

BMW has subsequently cut dealers second quarter sales targets from 10% to zero in the second quarter, but believes overall sales growth should still come in around the high single digit level for the whole of 2015.

As for Brilliance’s Qi he may recall a 2012 episode of Top Gear in which the UK show’s flamboyant presenters made a trip to China and kicked the tyres of locally-made brands. They concluded that Chinese cars weren’t much good, but they were a lot cheaper than European cars and also a lot better than they’d been five years before. Using the same logic they asked whether Chinese cars could improve at a similarly impressive rate in the coming five years – to the extent that by 2017 they might even be seen on Britain’s roads. That now looks like a forlorn prediction, especially in respect to Brilliance’s Zhonghua brand.


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.