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Chinese vehicles intensify assault on SA market

By: Irma Venter

Published: 29 Feb 08 - 9:22


We may set up a manufacturing plant in South Africa,” says Geely South Africa chairperson Jacqui van Heerden. “If we achieve sales of around 10 000 units a year, we’ll consider it. Markets such as the US and Europe may also offer lucrative export opportunities.”

Geely is only one in a series of Chinese vehicles which have entered the country over the last two years, all through entrepreneurs aiming to snatch market share in the largest economy in Africa.

Geely’s plans are indicative of a new phase in Chinese vehicle manufacturing. It’s no longer only about making and selling vehicles in China. It’s about making and selling vehicles in China, and everywhere else in the world. And not a Chinese-made Honda or Ford either, but a true Chinese brand.

Geely is one of the first movers in this regard. It can afford to do this as it has no bureaucratic ties.

Geely is privately owned, with no shareholding by the Chinese govern- ment – which erases the argument of unfair competition owing to State subsidies. (The only other privately owned Chinese vehicle manufacturer, Chery, will start exporting vehicles to South Africa later this year, with the distribution rights going to McCarthy.)

What this means for Geely South Africa is that the Chinese parent company holds a direct stake in the local company, as it considers South Africa an important part of its future export growth strategy.

Geely South Africa is, therefore, 40% owned by the Chinese parent company, and 60% by local company TJM Holdings.

Van Heerden says TJM Holdings looked at trends worldwide, and decided “that Chinese vehicles are going to be the next big thing”.


JAPAN, KOREA, CHINA?
These days, South African business says ‘China’ is preceded by the same audible gasp once reserved for South Korea or Malaysia, or any other so-called Asian tiger.

It even seems the economic threat of these other tigers has been tamed – or do their performances simply dim in comparison to an economy which last year recorded its fifth year of economic growth at more than 10%?

South Africa Inc can feel the competitive impact of Chinese goods on nearly every level of economic activity, including the local car and truck market.

The Chinese have proved that cheaper is always possible, and this is certainly also true for vehicles from the Asian country appearing in rapidly increasing numbers on South African roads.

Prices are low, specifications are high, but there remains persistent questions about the quality of some of the badges. Driving a Chinese vehicle sometimes feels like entering a time warp – as if one is stepping back into the 1980s and its signature boxy design and plastic-looking interior.

Industry commentators say it is only a matter of time before the Asian country gets it right, much as Japanese and Korean car makers had to battle for their place in the sun.

“Chinese vehicles are improving – no doubt about it – but whether this will happen at the rate customers demand, we don’t know,” says Toyota South Africa marketing and com- munications GM Brian Eades.

He notes that there is still more competition to come from the Koreans – Kia, Hyundai – before Chinese vehicles start playing a more prominent role in the South African market.

Eades adds that some of the lesser-known vehicle brands in South Africa have been suffering steeply declining sales over the last 12 months as consumers tightened their belts owing to rising interest rates.

This drop in numbers was most prominent in the sale of vehicles from that other aspirational vehicle manufacturing country, India.

“Once those sales are lost, it will be difficult to re-establish yourself,” Eades warns.
South African vehicle sales declined by 5,4% in 2007 compared with the record numbers achieved in 2006.

“When times are good, consumers take chances on new brands,” says Eades. “But when the economy tightens, they return to the well-known brands.”

Toyota is certainly a well-known brand. It’s like the Coca-Cola of vehicle manufacturers. Last year, it was once again the market leader, selling more than 25% (up from 23% in 2006) of all new vehicles driving off showroom floors in South Africa. It does not appear to be feeling the pinch from the rising Ka-ching dynasty – not yet, anyway.

With economists and market watchers expecting local passenger vehicle sales to decline further in 2008, the notion of returning to the familiar does not bode well for the wide range of Chinese vehicles which have entered South Africa in recent boom times.

 

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TOYOTA IS ALSO AN ASIAN BRAND
The folks at Toyota probably cringe at the comparison that is often drawn between the Japanese company entering South Africa, and the introduction of Chinese vehicles into the country.

Toyota South Africa was established by Dr Albert Wessels, who started the company by importing ten of the Japanese car manufacturer’s pick-ups in 1961.

McCarthy CE Brand Pretorius said last year that his company would introduce a series of Chinese products “over the next 12 months”.

Already the first introduction of heavy equipment has been followed by pick-ups and minibuses, with the introduction of Chery passenger vehicles imminent.

Pretorius says the company’s programme of launching Chinese brands into South Africa is similar to the situation in the 1960s, when McCarthy rolled out Japanese badges, such as Toyota – now South Africa’s number one selling car.

“There were concerns over quality and after-sales service, but look what has happened.

“The Chinese will also become formidable players. The same critical success factors are there – as they were with the Japanese companies: work ethic, quality and competitive pricing, and the intention to penetrate major markets.

“One cannot afford to ignore the China factor.”

In a 2006 article, The New York Times put forward the same argument.

“That’s not to say that the Chinese will not follow in the footsteps of Japanese automakers, who first sent over chintzy cars that were roundly criticised, only to set new standards for the industry in later years.”

Pretorius says McCarthy has often been asked why the company dabbles in Chinese brands.

“We are part of a public company. Bidvest needs to grow, and we see Chinese ventures introducing a new era of growth in mobility.”


THE KEY DIFFERENTIATOR
Nearly every city and South African dorpie has a Toyota dealership – somewhere to go should ole faithful also one day fail to start.

Many Chinese vehicles, however, do not have that infrastructure available to customers. So, what do you do if your brand-new Chinese pick-up breaks down?

Pretorius believes providing service and backup will be a key differentiator in the race to separate one Chinese brand from another.

Jolyon Nash, executive director in charge of McCarthy’s vehicle import and distribution division, says he expects a “dogfight” in the market in the next four to five years as more and more similar-looking Chinese brands are launched.

This is why McCarthy is rolling out McCarthy Value Centres to support the group’s new Chinese brands, while also providing free roadside assistance in case of a breakdown.

“We firmly believe that the key differentiator in such a competitive market will be the quality of after-sales service that is provided,” says Pretorius. “The McCarthy approach should set us apart, as these dealer- ships are owned and controlled by McCarthy, operating to our acknowledged high standards.”

However, other Chinese vehicle distributors have also realised that finding longevity and credibility in the marketplace demands that they follow a similar approach. If the vehicle is not yet proved, it’s best to back it to the hilt if one still wishes to be in business tomorrow.

This is why Geely is setting up a network of 30 dealers, growing to 50 by the end of this year, says Van Heerden. All Geely dealers are also required to provide service and support for the product.

“In addition, a well-stocked centralised warehouse and optimised distribution system ensure that parts and accessories are available at all times to the dealer network,” explains marketing director Efce van Heerden.

“The next step is to enter Namibia and Botswana.”

Geely also opened a training centre this year, showing technicians the ropes on its range of new vehicles.
Efce van Heerden adds that Geely offers a three-year/120 000-km warranty, indicating its faith in the brand, as well as 24-hour roadside assistance.

Another popular Chinese brand, China Auto Manufacture, or CAM, has more than 40 dealerships throughout South Africa.


ISSUES OF QUALITY
Not all Chinese entries into South Africa have been backed by major local companies, or launched with similar involvement from the Chinese parent company such as Geely and some others have seen.

Some names pop up at random, with no introduction through the motoring media.
Even Geely has – to date – shied away from a big media launch.

McCarthy held a launch for the Meiya pick-up range and the Foton panel van – receiving a fair amount of negative press.

Before the launch, though, Pretorius did signal a warning to the media, saying, “In our minds, the product provides acceptable quality.

“We’re not saying it will match the best brands, or that our technology is the greatest, but we are saying it is acceptable quality . . . which we’ll sell to customers for its functional use.”

Are motoring journalists spoiled with German luxury sedans providing any imaginable feature, or is the quality of these vehicles really suspect?

GoNow Auto South Africa launched its range of bakkies into the local market last year – but only after tweaking the quality of its vehicles.

GoNow is a 100%-empowered subsidiary of holding company Boston Super Group, based on the East Rand. The importer is managed by Adri Roe, who was responsible for bringing Daewoo to South Africa. She was also marketing and sales GM for Chevrolet South Africa.

“With GoNow, we looked at manu-facturers in China with the potential of growing internationally, not just in the Chinese market,” said Roe at the launch of the vehicles.

She said the company eventually focused on a handful of manu- facturers with “better-quality vehicles more suitable for our market”.

“After receiving the first right-hand-drive models, we made dozens of improvements to the vehicles, including more than 40 changes to the finish and trim.”

However, whatever motoring journalists are writing – or not writing – Chinese vehicles are selling in South Africa.
For example, sales of the little Chana pick-up showed a massive jump from 595 units in 2006, to 3 048 in 2007.
Paying (much) less has proved a powerful incentive.

 

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NAMES AND NUMBERS
Most vehicle sales in South Africa are recorded through the National Association of Automobile Manufacturers (Naamsa).

Associated Motor Holdings, which imports Kia, for example, does not report through Naamsa, but does provide sales numbers.

However, many Chinese distri- butors do not report their sales through Naamsa, or through any other channel. (The exceptions are McCarthy and Chana, which do report through Naamsa.)

So exactly how many Chinese vehicles are sold in South Africa each year?

It’s anyone’s guess, says Naamsa executive manager Norman Lamprecht.

“We do not have any actual sales figures, but estimate that the Chinese portion of sales represented between 10 000 to 12 000 units in 2007.

“Growth has come from virtually nowhere over the last two to three years to the current numbers. Especially 2007 produced several new entrants.”

Pretorius says he also estimates that 10 000 units or more were sold in South Africa in 2007.

“Chinese vehicles are not a factor yet, but what will it be like five to ten years from now? Will they gain a strong foothold? The jury is still out on that one.”

Econometrix director and economist Tony Twine believes Chinese vehicles are set to take a bigger slice of the cake, “especially as current global economic conditions impact Chinese domestic demand”.

“Millions of Chinese-made vehicles will flow from China, looking for homes.”
Lamprecht says Naamsa has identified several Chinese brands present in South Africa to date.

They include Chana, Firmaco/Powerstar, Meiya, Great Wall Motors, GoNow, Chery, CAM, Geely, Soyat, Dongfeng, Africar, Foton and Xspace.

Lamprecht says Naamsa expects the number of Chinese importers and distributors in South Africa to grow even further.
“China has a large number of vehicle manufacturers – in the order of 130, based on available information.”

Lamprecht says most Chinese brands are represented through importers and distributors, “but one or two larger companies are undertaking feasibility studies to investigate the possibility of completely knocked down production of passenger cars”.

Initiating local production could have a further effect on pricing, shaving off the 27% import duty on the vehicle entering South Africa as a fully built-up unit, as well as reducing the shipping costs.

Lamprecht believes the reason for China’s interest in the South African automotive market is the country’s position as the largest economy in Africa.

“It is part of China’s overall approach and policy to play a bigger role in Africa.”

Already China is developing vast infrastructure in many African countries, in return for access to much-needed natural resources.

Lamprecht believes the future of Chinese vehicles in South Africa may be secured through their pricing.

“These vehicles are very competitively priced and, in a market already overtraded, the consumer will benefit as price will, no doubt, influence purchasing decisions.

“Interest rate hikes and the more stringent requirements of the National Credit Act impact on the level of disposable income for first-time buyers, or buyers interested in new entry-level vehicles.”

Prices are indeed low compared with the more known vehicle badges from the US, Europe and other parts of Asia.
The most affordable product in McCarthy’s Meiya range is the Meiya 2,2-ℓ single-cab bakkie that retails at R89 900, with a one-year unlimited kilometre warranty.

Geely’s basic CK-1 sedan sells for just under R75 000, and includes power steering and electric windows.
GoNow starts at R95 000 for a one-ton single-cab bakkie.

A Chana costs less than R60 000.
To buy a vehicle with similar paper specifications from a more popular brand can cost up to twice these figures.

 

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BUT WHAT ABOUT VIABILITY?

It’s about a bit more than the price tag, though.

Pretorius notes that last year’s tough trading conditions for the automotive industry – expected to continue this year – will “impact the viability of smaller importers”. “It will put them under severe pressure.”

These smaller importers include some Chinese vehicle distributors.

Pretorius says a tough market such as the one expected in 2008 will require a significant marketing budget, which some smaller com-panies may not have.

Also, being a smaller importer ensures that a company has no hedge against the weakening rand by also exporting vehicles; it has no eco- nomies of scale; and there is no large population of its vehicles on the road able to see dealers through the lean times by providing income through after-sales service.

“Some upstarts have limited resources. They have acted opportunistically, and they will fall by the wayside in these tough trading conditions,” says Pretorius.

“However,” he adds, “it’s too soon to talk about that. The memory of the good times is still too recent.”

Financing may also not be a straightforward matter.

Vehicle financier Wesbank says it won’t just finance any Chinese vehicle entering the South African market – even if that vehicle has been homologated by the South African Bureau of Standards.

Sales and marketing director Chris de Kock says Wesbank is willing to finance Chinese vehicles, but “we do a careful analysis of the importer bringing the vehicle into the country”.

“If it seems the company has a long future ahead of it, then we’ll finance the vehicle.

“The importer cannot simply be in the country two to three years and then leave.

“If the company goes, the value of those assets disappears along with it.”


IS IT A WORLDWIDE TREND?
Chinese vehicle manufacturers seem much more cautious about entering the US or European countries than they do to set up shop in South Africa.

Nobody wants to venture a clear answer on why this is happening, noting only (hesitantly) that barriers to entry – such as safety standards – may be higher in these countries. It may also be a matter of taste, with the square-looking Chinese vehicles not necessarily satisfying the sophisticated appetite of the Italians and the Germans.

Americans and Europeans are, perhaps, also less price sensitive, with China’s expertise at doing things more cheaply then becoming somewhat irrelevant.

The Chinese are certainly trying to enter these lucrative markets, but it has been a slow, and sometimes painful, process.

In 2005, a German automotive club tested a Chinese vehicle sent over to Europe, coming up with a rather embarrassing result.

The Landwind New Vision received the worst rating the club ever awarded in 20 years of testing.
Tests like these have encouraged some Chinese vehicle manufacturers to postpone their entry into the US and Europe.

However, these manufacturers have been delayed – not deterred.

At this year’s Detroit motor show, it was clear that several Chinese vehicle manufacturers are actively preparing for entry into the US, each with its their own range of vehicles.

This year’s show featured four Chinese manufacturers – Geely, BYD, Changfeng and Li Shi Guangming – and they attracted a lot of attention from the motoring press.

However, it is also clear that they remain cautious about the US market.

A Changfeng official noted that it is important for the company to develop quickly, “but that it will take its time in the US”.
General Motors CE Rick Wagoner estimates that Chinese competition in the US is five to ten years away. However, even he couldn’t deny that the Chinese are definitely, and forcefully, knocking on the door.

Chinese vehicle manufacturers have illustrated their willingness to adapt to the standards set by the markets they wish to enter, fuelled by the dream of going global.

Geely International Corporation project manager Alex Liu – in South Africa to assist in setting up Geely South Africa – says his company is in the process of obtaining a European NCAP rating. (The New Car Assessment Programme crash-tests cars to establish just how safe they are.)

In addition, the company, which also manufactures engines, is develop- ing a Euro-4 engine, which will meet the latest emissions standards set by European countries.

Liu says Geely hopes to export 1,3-million vehicles (of its planned two-million vehicle production) to several global markets by 2015.

He also points out that Geely is a truly Chinese-designed and -manu-factured car – as opposed to many US and European manufacturers flocking to China to take advantage of the lower cost of production to manufacture their own badges, or some Chinese manufacturers producing product lookalikes. (Criticism often levelled against Chinese vehicles is that they are merely cheap knock-offs of existing brands.)

A new technology gap develop- ing between Chinese manufacturers and European and US car manu- facturers seems to be through hybrid or electric vehicles – for those ‘green-minded’ people aware of global warming.

If buyers migrate fast enough to these vehicles, it will give Western producers a bit of a breather before, and if, China finds a way to manufacture these new-technology vehicles more cheaply.


LABOUR COSTS
While Chinese vehicle manu- facturers are pressing ahead with their entry into global markets, they may just found that they are losing some of that all-important cost advantage.

Reports from China indicate that labour costs are rising, aided by a 12-year-high inflation rate recorded in January this year.

New labour laws are set to intro-duce shorter working hours and enforce the introduction of medical aid, all leading to increasing labour costs.

The China National Committee on Ageing – cited by Reuters – reports that China’s advantages as a low-cost labour market could be eroded by midcentury because of its rapidly ageing population.

China currently has six people in the workforce for every retiree, but that ratio could narrow to two people for every retiree between 2030 and 2050, according to a committee population survey.

The committee’s deputy director, Yan Qingchun, says, “With fewer people of working age, and more pressure in supporting the elderly, the economy will suffer if productivity sees no major progress.”


THE BIGGER PICTURE
China is about much more than vehicles, though. Vehicle production and exports are only one indicator of a much larger trend.

The country’s current global growth story holds indications of a new era starting, says First National Bank chief economist Dr Cees Bruggemans.

He regards the Asian growth story as only beginning, “not even near halfway yet”. He believes the economic rise of Asia may have another 30 to 50 years remaining, with China having been first to excel, followed by India, then Bangladesh, Pakistan and Indonesia and other countries set to trail in their wake.

Bruggemans views this process as “three- to four-billion people on the move”. “It should be the last great industrialisation, with only Africa left to follow. We’ll see this happening for another generation or two.”

Bruggemans says the Chinese are only doing what the Japanese, the Koreans, the Europeans and the Americans did before them.

“They are in ascendency. Will the structure of the global vehicle industry change? In the long term, the answer is ‘yes’.”


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