Imagine you're leading a multi-billion dollar car business in China. A senior ministry official from Beijing comes to you with a request: Develop an indigenous brand of cars. What do you say?
"Ah, yeah, sure, we're always open to new ideas. What do you have in mind?"
"There's a big opportunity. We have a huge market -- huge -- for cars priced under $12,000. And with an indigenous brand of cars, you and your Chinese partner can capture hundreds of thousands of new customers."
"Um, OK," you say while your stomach starts the churn. "You know, I think we're already hitting that price segment with our current joint venture products."
"No, no, you don't quite see it yet. You can do this new brand together with your Chinese partner. With an indigenous brand, both of you will own the product rights, not like today when only the foreigners own the intellectual property."
"Uh, more brands? I'm not sure I understand. Isn't your ministry pushing hard for industry consolidation -- for fewer brands?"
"Look," says the official, losing patience. "I happen to know that you are waiting for approval to build more capacity for your best-selling sedan. Do you want the approval or would you prefer to wait? Then, for effect, he adds: "Several other foreign companies already have formed an indigenous brand. I don't really understand your attitude."
"Oh, right, right, I see your point," you mumble. Then you remember that you're in China, and you're playing a permanent away game. "You know, I think your idea for a new car brand is perfect. How soon can we get involved?"
Getting involved is strictly voluntary, of course. There's no Chinese law requiring formation of an indigenous brand. It's only a recommendation. So far, GM, Nissan and Honda have launched indigenous brands.
You will see some of these brands at the Shanghai auto show. GM will display the Baojun 630 compact sedan, which it has developed via its SAIC-GM-Wuling joint venture. The Baojun 630, which is derived from the old Chevrolet Optra, went on sale this year.
Meanwhile, Honda's joint venture with Guangzhou Automobile Group Co. will display the Everus S1, a variant of a previous generation Honda City.
The Baojun 630 and the Everus S1 are priced under $10,000.
Volkswagen, Hyundai and Toyota, among others, are in talks with their Chinese partners to form new brands.
In a market with more than 85 foreign and Chinese brands offering vehicles priced from $3,000 to $300,000, what's the point in creating new brands?
The official line goes like this: Foreign car companies and their Chinese partners decided together on a strategy to develop small cars for the under-$12,000 segment. It's a market of 1.8 million cars, going to 2.5 million by 2015.
Foreign companies now will be able to attract customers in the lowest price segments, using previous generation technologies while preserving their own brands for the higher, more lucrative segments.
The uncensored version looks more like this: China wants its own brands to dominate the home market. The initial plan, hatched 25 years ago, was for Chinese firms to absorb know-how through joint ventures. That approach has not worked. Foreign brands like VW, Buick and Honda still take 70% of the car market.
So Beijing is going with a Plan B: Approve the expansion plans of foreign automakers only if they create Chinese brands. But don't refer to them as Chinese. Call them indigenous.
"Where is this going?" your boss back in America asks.
"Short-term, it's OK. We will get some more sales and profits at the low-end. And we'll split the money just like we do with our current joint venture products."
And what about the long-term?
"It's a Chinese end-around. After the indigenous brands dominate the low-end segment, they'll move up to higher price points, and compete with our own cars. Second, with the Chinese now owning the intellectual property, watch these low-cost cars get exported in massive numbers to emerging markets, places that we now supply with exports from home."
"Oh, that's tight. So, what are our options then?"
"Our options, boss?"
|ABOUT THE AUTHOR|
Mike Dunne is president of Dunne & Co., a Hong Kong-based investment advisory firm. This column appeared in Automotive News China, a sibling publication to Ad Age.