19 November 2018

The Chinese are coming - again

The news that a brand previously unknown to most western vehicle buyers, Zoyte, is planning to bring a range of SUVs to the US market by 2020 put me in mind of my first visit to China some 18 years ago.

Even then, I could see that the OEMs I visited there had a much better grasp of global markets than many so-called experts in the market research departments of many western vehicle makers. As far back as 2010, the Chinese had identified several important factors in the difficult task of exporting vehicles to the west profitably. One of the elements that is key to making real money out of shipping products across the globe is scale. Marketing executives at the OEMs in China often pointed to two contrasting business models, that of selling very high numbers of cheap goods to the west, such as toys, electrical and electronic items, toys and what we used to call fancy goods. Making a profit from this model relied on very low raw material and production costs combined with low-cost shipping and handling. It was also empowered by the rapidly growing power of Internet marketing, witness the explosive growth of the Alibaba Group’s retail revolution, which recently sold in one day as much as Amazon retails in three months. The other model is that of making high-value quality items.

So why did Chinese OEMs not follow a similar high number business model in retailing lower segment cheap vehicles to the rest of the world? As the executives I met first all those years ago explained, the Chinese way of business thinking is partly predicated on two important ‘pillars’: maximise profit on products by serving established demand and, when selling high-value items, look for the maximum cost/benefit ratio.

In the case of vehicles, there were some unfortunate and premature attempts to sell larger Chinese-made vehicles in the west. Some of us will recall the disastrous crash test results of the Landwind SUV, which was more dangerous to be inside in an accident than to be hit by even if one was in an even smaller vehicle.

The success stories in Chinese-made vehicles’ exports have been in the high-value products; pickup trucks from Great Wall have sold well in many European countries and, while they undercut their Japanese competitors, they return handsome profits. As to satisfying an established demand, the Chinese have very intelligently observed the falling fuel prices globally and the consequent demand for larger, thirstier SUVs and light trucks (pickups in the world outside the US) and they are responding.

As I remember one Chinese OEM marketing chief saying to me, not entirely jokingly: “It does not cost ten times as much to make a Bentley as it does a VW Golf but it makes more than ten times the profit so why would we not want to make and sell our own Bentleys?”

Simon Duval Smith

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