China
Introduction
Four Japanese companies have led the world motorcycle industry since the 1970s through a sophisticated network of wholly owned subsidiaries, joint ventures, and technically supported local makers and the great majority of models are produced under the brand names of these four makers, except in China.
Instead, the principal players in China's motorcycle industry are Chinese firms, and the main market is the domestic market. In 1993 production in China passed that of Japan, and continued expanding rapidly in the early to mid 90s. Japanese makers entered the Chinese market in the 80s and from the beginning of the 1990s, about twenty foreign-JV firms were established in China, ten of them by the four major Japanese makers. Their total domestic market share at the end of the 1990s had shrunk to approximately 5%. China is the only market in which Japanese makers failed to establish leadership. This indicates the presence of unique elements in the development process of domestic firms in China.
In China, the motorcycle industry went through the phases of import, import substitution by domestic makers and export, with domestic makers sharply increasing their exports from around year 2000. Their destinations were low-income countries in Asia, Africa, and the Middle East, all markets which resembled the Chinese market in some way. Instead of developing a technological capability, cost leadership increased their appeal in the global "low-end market."
In 1953 Japan had close to 140 manufacturers, but 20 years later this had shrunk to 4. Both Japan and China saw a rise in domestic demand, followed by stagnation, fierce competition and the cultivation of overseas markets. And yet in China the concentration of market share amongst leading makers remains low. Here we look at the past, current and future role of the Chinese motorcycle industry.
Background
Following the defeat of Japan in World War II and the rival Nationalists soon after, the Chinese Communist party proclaimed the establishment of the People's Republic of China in 1949. Decades of a poorly managed centralized economy ensued and after the death of party leader Mao ZeDong, Deng Xiaoping emerged as the most influential leader. Facing wide spread destitution across the nation, in 1979 he introduced a series of significant economic reforms which involved the de-collectivization of agriculture, the opening up of the country to foreign investment, permission for entrepreneurs to start up businesses and the setting up of special economic zones. Although most industry remained state-owned, the initiatives brought rapid development but also confusion and widespread unemployment. The 1989 Tiananmen Square protests by students and others lasted several months as they spoke out against corruption and in favor of greater political reform. They were eventually suppressed by military force causing significant casualties. The second stage of economic reform followed and involved the privatization and contracting out of much state-owned industry, the extension of special economic zones and the lifting of price control protectionist policies and regulations.
This chain of events marked China's transition from a planned economy to a mixed economy with an increasingly open market environment, a system termed officially by the Communist Party of China as "Socialism with Chinese characteristics". The PRC's economic performance pulled an estimated 150 million peasants out of poverty and sustained an average annual gross domestic product growth rate of 11.2%. The country formally joined the World Trade Organization in 2001.
Motorcycle industry
China’s economic strategy in the 80s lead to the creation of a huge pent-up demand for cheap motorized transportation. As in post war Japan and Italy, low cost individual mobility was essential for job seekers. A series of state owned enterprises switched their attention away from military hardware towards motorcycles. Many firms were launched with fiscal advantages, machinery, technicians and special permission to introduce foreign technologies. Some firms failed this transition, but no other motorcycle industry has ever started in this way, with the market, the workforce, real estate, machinery and finance provided for them and in the early 90s these firms dominated.
It was the nature of the market that helped set the trajectory for its development. Satisfying that demand would take more than a decade. During that time makers and suppliers focused on a few engine designs received from Japanese makers that could be copied with impunity and began to treat components like basic commodities, for a transaction based approach was after all most efficient. Attempts to introduce new models were shunned by the market leaving little space for Japanese makers to leverage superior technical know-how as the designs initially shared already met the need of the market.
In what was a poorly regulated environment many smaller state-owned firms as well as private firms entered the market. The private firms usually lacked foreign technology and instead of focusing on product development they paid attention to building comprehensive supplier networks and superior quality from well organised assembly operations. They were quick to introduce copies of the most popular engines by entering the state-owned makers' supplier networks. By keeping prices much lower than the competition and by introducing minor changes that refreshed products without altering engineering fundamentals, sales accelerated. The most notable were Grand River and the Chongqing 3; Zongshen, Lifan and Loncin.
Despite attempts to reduce congestion and pollution by banning motorcycles in some cities, sales from provincial cities and rural areas continued to rise. Many consumers were inexperienced first-time buyers, whose selection criteria was based on insufficient information. Often word-of-mouth advice was the only consumer information available. The most visible models in the market were also popular as buyers concluded that not all the owners could be wrong. High visibility also suggested ease of access to service.
By the turn of the century supply exceeded demand and prices fell. Exports of copy-cat underbone motorcycles became the new focus. The efficient private firms were better placed to resist the crisis and began to dominate. Japanese makers found themselves tied to inefficient JV partners and products that were priced for a high end segment that as yet didn't exist. Firms in post-war Japan such as Honda battled for survival against ferocious competition. Technical competence and quality were its source of competitive advantage. Honda developed the Super Cub in 1958, which signaled a technological advancement, confident that the cover afforded to it by intellectual property rights legislation would ensure a return on investment. This forced companies with inferior products to exit the business more quickly. Such conditions did not exist in China in the 90s and stunted the development of the motorcycle industry.
Every business success is the manifestation of a product or service that is propelled forward by the passion of a single person or team of people, such as Soichiro Honda’s vision for Honda’s future. Perhaps this is why private firms like Zongshen, Lifan, Loncin and Grand River have a visionary at the helm and enjoy continued success while despite their favorable start, state owned firms such as Jinan Qingqi, which has lost money in 3 out of the last 4 years, continue to flounder.
The specific features of the Chinese motorcycle industry combined with its enormous size mean that until now it cannot be compared with any other.
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Current trends
By the second decade of the new century the market for cheap transportation has become saturated and a more pronounced segmentation is emerging. Many customers have become bored with repetitive designs and seek an improved riding experience, comfort and safety. Furthermore their expectations of quality and brand intangibles such as prestige have changed.
New emissions regulations (China III) will concentrate market share in the hands of the few technologically capable manufacturers who have benefited from sufficient R&D spending or a strong JV partnership. These changes will lead to an increase in the cost of components, labour and transportation, which may negatively affect exports.
Starting July 1, 2010 motorcycle manufacturers were not permitted to produce motorcycles that did not meet this new emissions standard while dealers were granted eight more months till February 28, 2011 to sell motorcycles built under the old emissions regime. During the initial implementation phase of this new emission standard, industry sales decreased as dealers were focused on selling existing inventory. However, over the longer term, it’s expected that the new emission standard will create significant market share growth opportunities for the big players as many of the smaller manufacturers which together account for 50% of total industry volume, lack the necessary capital and technical expertise to upgrade their facilities to produce emissions compliant motorcycles and as a result, will either exit the industry or be acquired by larger competitors. Enforcement of the standard in remote rural regions of China may be less stringent. If the standard is not strongly enforced, some competitors could continue to produce older non-compliant motorcycles which will take away sales from compliant bikes. The banning of petrol driven motorcycles in many cities has also stimulated a growth in electric bikes, increasing from 40,000 in 1998 to 15 million in 2007.
On the back of some intellectual property rights victories following China’s joining of the WTO and the introduction of more severe gas emission regulations which challenge smaller makers with limited access to technical know-how, the Chinese market now represents an environment for Japanese manufacturers to leverage their superior technical capabilities. They now appear willing to make more substantial investments in order to increase market share but also develop an oligopoly and reduce the number of Chinese export firms.
This is a strategic step with repercussions outside China as many small Chinese firms have been making CKD copies of under bone (Super Cub) models and exporting them across the world. In tandem with a return of focus to China, Japanese makers are also upgrading the technical content of product in developing markets (e.g. Yamaha Lexam) where they are dominant in order to marginalize Chinese makers. Small to medium sized Chinese makers will be put under pressure in their home and export markets.
Summary of leading players
The following is a brief review of the main players starting with those that are state-owned and publicly listed:
Jinan Qingqi Motorcycle Co., Ltd was established in 1956, with its headquarters located in Jinan City, Shandong Province, manufacturing motorcycles for civilian use. In 1985 Qingqi initiated a technical agreement with Suzuki, and manufactured the first scooter in mainland China. Qingqi was one of the 19 state-owned motorcycle makers established for civil-demand-oriented motorcycle production. The relationship with Suzuki became a joint venture in 1996, followed by one with Peugeot in 2006.
Annual production capacity is 800,000 motorcycles and 1 million engines.
In 2002 Qingqi registered a net loss of CNY 3.4 billion (USD 410 million) and in 2006 were taken over by state-owned China South Industries Group Corporation (CSG) which is managed by China's central government. Qingqi is listed on the Shanghai stock exchange but despite the takeover continues to perform badly showing a negative net income in 3 of the last 4 years.
QianJiang was founded in 1985 as a state-owned enterprise.
Its product range now includes motorcycles, scooters and mopeds from 50cc to 1,130cc under the Qjiang, Benelli, Generic and Keeway brands. Present production capacity is 1.5 million 2-wheeled vehicles and 2 million engines per year. Over 22% of products are exported. QJ also manufacturers ATV and mini dirt bikes.
QJ’s management motto is “European design, Japanese quality with Chinese cost”. QJ’s R&D centers are in Europe and China.
Qianjiang is listed on the Shenzen stock exchange.
Chongqing Jianshe Motorcycle Co Ltd was established in 1889 and has over a century of manufacturing and service experience. As a state owned enterprise it started cooperating with Yamaha in 1980. Chongqing Jianshe Yamaha Motor Co., Ltd. became a joint venture in 1992 between Yamaha Motor Co. and the Chongqing Municipal People’s Government. The firm manufactures complete Yamaha-brand motorcycles and represents Yamaha's main effort in China.
Jianshe is listed on the Shenzen stock exchange.
China Jialing is a state-owned listed company, whose holding company is China South Industries Group Corporation. China Jialing’s leading products are motorcycles, engines, plastic and high-tech optical lens and general machinery components.
China Jialing was first established in 1875 and was part of the movement to transition military production towards commercial products in 1979.
Jialing started technical cooperation with Honda in 1981. “China Jialing Group" was set up in 1987 and entered the Shanghai Stock Exchange in 1995. Jialing has an annual production capacity of 2 million motorcycles.
The following firms are privately owned and publicly listed:
Zongshen was founded in 1992 as a private enterprise and consists of 52 wholly owned or part owned subsidiary companies. Based in Chongqing, China, it has an annual production capacity of 2 million motorcycles and 4 million engines.
Zongshen started participating in international motorcycle racing in 1999. The team has enjoyed success in the FIM World Endurance Championship, Asia Road Racing Championship and China Super Bike Championship.
Zongshen is listed on the Shenzen stock exchange. Chairman Zuo Zongshen grew the company from a motorcycle repair shop started in the late 80s, was ranked by Forbes magazine as China'S 204th most wealthy man in 2010.
In 1992 Lifan was founded by Yin Mingshan, a convicted dissident, as a motorcycle repair shop with a staff of nine and became the fifth-largest Chinese motorcycle maker in only seventeen years. The company was officially named Lifan Industry Group in 1997.
2006 saw commencement of automobile production after the 2003 acquisition of Chongqing Special Purpose Use Vehicle Manufacturing Co Ltd.
Lifan is listed on the Shanghai stock exchange.
The following firms are state-owned and unlisted:
Luoyang Northern Enterprises Group Co., Ltd. was founded in 1969 as part of the national defence industry and a subsidiary of China South Industries Group Corporation. It started to produce "Luojia" brand series motorcycles at the end of 1983 and as one of the first 19 pilot motorcycle enterprises nationwide, in 1992, Luoyang Northern Enterprises Group Co., Ltd. (45%) and Thailand Charoen Pokphand Group (55%) founded a joint venture company "Luoyang Northern Ek Chor Motorcycle Co., Ltd." to produce "Dayang" brand motorcycles. Chai Tai Group is a multinational company, founded by Thai Chinese.
The company has a production capability of 1,500,000 sets of motorcycles annually.
Jincheng (ex JV with Suzuki)
Nanjing Jincheng Machinery Factory is a state owned company established in 1949 to manage aircraft maintenance and subsequently in 1958 the manufacture of aircraft equipment. In 1979 Jincheng’s military focus was switched to civilian commercial products and Jincheng turned its attention to motorcycles. In 1985 manufacturing techniques were acquired from SuzukiJapan. In 1992 Jincheng Motorcycle Group was established and a JV with Malaysia's Lion Group in 1994 formed Nanjing Jincheng Machinery Co., Ltd. In 1997 Nanjing Jincheng Motorcycle Co. Ltd. was formed. Jincheng was a key player in the 90s and had an early role in establishing manufacturing overseas, building the first Chinese motorcycle joint venture in South America.
The Lion Group divested in 2005 and annual production capacity is about 200,000 motorcycles.
Guangshzou Dayang Motorcycle Co. Ltd.
Guangzhou Dayang Motorcycle Co., Ltd was founded in December of 1999. The company mainly produces "Dayang", "Dayun" and “Fengchi” brand motorcycle. The annual output is 1,500,000 complete vehicles and 2 million engines.
Sundiro Honda Motorcycle Co. Ltd was set up in 2001, financed and established by Sundiro Holding Co., Ltd, Honda Motor Co. Ltd and Honda Motor (China) Investment Co., Ltd, with each party holding 50%.
In 2007 Sundiro Honda reached 1 million in exports and in 2008 6 million in total production.
Sundiro Honda Motorcycle Co. Ltd strictly observes Honda Globally Universal Standard of Product Quality and together with Wuyang Honda comprise Honda's main motorcycle effort in China.
GuangzhouMotors (JV with Wuyang Honda)
Guangzhou Motorcycle Group Company was established in 1992 and at the same time a Sino-Japanese joint venture was formed with Honda Motor Ltd. called Wuyang-Honda Motors (Guangzhou) Co., Ltd. Up to the end of 2007, the company had produced 5,430,000 motorcycles, of which 330,000 of them exported. The company is now part of Guangzhou Automobile Industry Group Co., Ltd., a company authorized by Guangzhou Municipal government to operate state owned assets.
The following firms are privately owned and unlisted:
Jiangmen Dachangjiang Grand River (JV with Suzuki)
Grand River was established in 1992 as a Joint Venture with Suzuki Motor Corporation (Japan) and is one of the first Chinese manufacturers to successfully increase production beyond 1 million vehicles per year and continue growing, reaching 3 million motorcycles per year. In 2010 the Grand River Group (parent company of Haojue) was the largest motorcycle manufacturer in China.
Loncin produces motorcycles, motorcycle engines and ATV. It has an annual production capacity of 2,500,000 motorcycles, 3,000,000 motorcycle engines and ATV capacity of 150,000.
Conclusion and prospects
During the last decade Japanese makers started to transfer production of small displacement vehicles to China for re-import back into Japan and export to other developed markets. This will of course continue, but displacements may increase. Japanese makers will seek scale efficiency and common product platforms for all markets and carefully integrate exports to developing markets where they already have solely owned manufacturing plants. At the same time they will scrupulously manage technology transfer to Chinese counterparts.
As greater segmentation develops in the domestic market Grand River, Sundiro Honda, Wuyang Honda and Yamaha Jianshe are able to leverage their JV partners to introduce appropriate models in a timely fashion, but how will the Japanese manufacturers handle the sharing of state of the art technologies either directly or through its loyal supplier network in order to maintain competitive positions? Perhaps fearful of a repeat of what happened in Taiwan.
Zongshen, Lifan and Loncin must find an alternative path to address the model development and technology issue, but they are not constrained by JV partners hesitant about sharing knowledge. With consecutive years of profitability they are well placed to fund internal innovation, procure it outside or assist suppliers to develop it. Alternatively they can follow the lead of QianJiang and purchase historic brands such as Benelli.
The domestic market is becoming increasingly unpredictable in terms of segmentation. Already line-ups are peppered with small displacement cruisers and off-road bikes. We can also expect the development of radically new task specific motorcycles for use in rural areas. The size of the Chinese market and the scale efficiency that this represents may create an opportunity for one of these firms to become a global player. At the same time gas emission regulations and urban restrictions are applying pressure on domestic sales and causing a surge in electric vehicle sales in place of motorcycles.